Bottom line: China Mobile’s latest results show that its business is starting to pick up after years of stagnation, which could provide some upside for its stock over the next 1-2 years as it steals share from its two smaller rivals.
Profit growth of 0.5 percent may not sound like anything to boast about, but at least it’s growth and not contraction. That’s the message that telecoms giant China Mobile (HKEx: 941; NYSE: CHL) hopes to send with its latest results, which show the company returned to profit growth in the first quarter of this year after a sharp drop in last year’s fourth quarter.
China Mobile’s return to profit gains was fueled by strong revenue growth, as the company took advantage of its early entry to 4G and aggressive promotions to build up its customer base and steal market share from its 2 smaller rivals, China Unicom (HKEx: 763; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: 728). The trend certainly looks positive for China’s largest telco, since its profit growth is likely to accelerate now that the most aggressive spending on its new 4G network is in the past.
Shareholders haven’t been too impressed with any of China’s big 3 telcos these days, mostly because all have been posting slow or no profit growth as the country’s mobile market matures and they spend heavily on new 4G services and networks. China Mobile’s shares are down 22 percent over the last year, and actually slumped slightly after this latest earnings report came out.
I’m not a big fan of any of these companies, but in this case I do see some potential upside for China Mobile’s shares due to an expected acceleration in many important metrics for the company. Not only should we see profits return to a stronger growth trajectory, but revenue could also increase sharply as China Mobile takes share from its 2 inept rivals, and its existing users also use their new 4G service to spend more on data.
One of the most encouraging signals coming from China Mobile was its average revenue per user, or ARPU, which stood at 57.6 yuan ($8.90), up sharply from 48.2 yuan a year earlier. (company announcement; English article; Chinese article) That trend reverses years of declines, including a 5 percent decline for all of 2015 when the full-year ARPU figure fell to 56 yuan.
The strong ARPU gains are especially important, because China’s mobile market is unlikely to grow much in terms of total subscribers anymore, since nearly all of the country’s 1.3 billion people already have service. The growth in revenue per user helped China Mobile post revenue growth of 9 percent, again up sharply from the 2 percent revenue growth for all of last year.
While net profit grew by the 0.5 percent I mentioned at the top of this post, the company’s operating profit was up by a stronger 7 percent. Most of the other figures in China Mobile’s report contain a similar message, showing that the company really does seem to be heading into a new growth period.
That growth is being fueled not only by greater data use but also as China Mobile boosts its already-dominant market position over Unicom and China Telecom. That reality was reflected earlier this week when Unicom warned that its profit was expected to tumble 85 percent in the first quarter due to rising expenses. (company announcement)
Many industry watchers like myself were hoping for a big shake-up among the big 3 telcos later this year, after a leadership shuffle in 2015 led to talk that Unicom and China Telecom might be merged into a single company. But the latest signals coming from Beijing indicate that no such overhaul is coming (previous post), meaning that China Mobile is likely to remain the best bet for at least the next year or two among investors who want exposure to this sector dominated by slow-moving state-run giants.
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