TELECOMS: China Mobile Finds Profit Growth, to Meet with Regulator

Bottom line: China Mobile’s return to profit growth is slightly encouraging but may be short-lived, while the MIIT isn’t likely to make any major new moves when it meets with China’s big 3 telcos on Friday.

Growth returns to China Mobile’s profit

After seeing its profits contract for the last few quarters, leading mobile carrier China Mobile (HKEx: 941; NYSE: CHL) finally wowed investors with an unexpected return to profit growth in its latest reporting quarter. But the euphoria was short-lived for China Mobile’s stock, which rose sharply after the report came out, only to give back all the gains by the end of the trading day. That would seem to show that investors are more worried about China Mobile’s top line revenue, which contracted during the quarter despite the profit growth.

At the same time, change could be coming soon for China Mobile and its 2 big state-run peers, China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU), which have all been called to a meeting with the telecoms regulator on Friday. There are plenty of things the Ministry of Industry of Information Technology (MIIT) may want to discuss with these 3 slow-moving and bureaucratic telcos, but  at least one media is speculating the trio could be getting set for some top management changes.

Let’s begin with China Mobile’s results, which are the most straightforward of these 2 telecoms news items. After years of breakneck growth due to relatively low penetration in China’s mobile market, China Mobile and its 2 peers entered a much slower period of expansion around 2 years ago as the market became saturated. The nation now has about 1.3 billion mobile subscribers, meaning nearly all Chinese now have service.

That saturated situation means that China’s 3 telcos can no longer sign up new subscribers for growth, but instead must steal from each other to keep adding subscribers. Of course they could also follow the lead of telcos in other saturated markets and try to develop new products and services to earn more money from individual subscribers. But China’s telcos are notoriously lacking at this kind of innovation, and as a result have seen both their revenues and profit growth slow sharply these last few years or even contract.

China Mobile has reported such profit contraction for a while now, so investors were probably surprised to see the company report its profits actually rose 2.7 percent in the second quarter to 33.5 billion yuan ($5.2 billion), reversing a 5.6 percent decline in the first quarter. (company announcement; Chinese article) China Mobile’s shares initially jumped 11 percent after the latest data came out, but then slumped and ended up closing down slightly on the day.

Shrinking Revenue

Investors were most likely disheartened by the company’s top line revenue, which fell by 2.1 percent in the second quarter, reversing revenue growth in the previous quarter. Frankly speaking, even the small profit growth doesn’t look that impressive to me and the revenue contraction certainly isn’t encouraging either. Accordingly, I wouldn’t expect any big excitement from China Mobile or any of its peers anytime soon.

That said, the reports of the MIIT meeting scheduled for Friday do look slightly intriguing, though I’m not convinced a leadership change is coming. (Chinese article) The MIIT has been rolling out a number of major new programs over the last 2 years, including a virtual network operator program (VNO) aimed at bringing more private sector money into the market. (previous post) The MIIT may also want to discuss another pilot scheme that will allow private investors into the previously forbidden area of infrastructure ownership. (previous post)

What would be truly exciting would be an announcement that real management professionals would be taking key leadership roles at the 3 telcos, rather than the government bureaucrats that have traditionally held such positions. President Xi Jinping has indicated he wants more such professional management at big state-run firms, though we’ve yet to see any concrete moves yet in that direction.

I’m cautiously optimistic that such a move will come in the next year or two. But I’m far less hopeful that this week’s meeting will be anything more than another bureaucratic session where telco leaders simply receive one of their regular briefings on the latest policy directives from central bureaucrats in Beijing.

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