TELECOMS: China Mobile Profit Zooms on 4G Growth

Bottom line: China Mobile’s strong profit growth shows the company has executed well on its 4G strategy, including strong promotion of data services that have rapidly become its single largest revenue source.

China Mobile notches strong Q2 profit growth

After a bumpy period over the last 2 years as it rolled out its new 4G network, leading wireless carrier China Mobile (HKEx: 941; NYSE: CHL) is finally reaping strong results from its efforts with some of the best profit growth I’ve seen in a long time. The company has just reported its interim results, which show that its profit jumped an impressive 9.2 percent in the second quarter, as it took advantage of its early entry to 4G to consolidate its place as the nation’s leading telco.

I’m not a big fan of China’s big 3 telcos, which aren’t great innovators and historically reaped big profits from their state-granted monopoly in the nation’s huge market. But now that most of the China’s 1.3 billion people have mobile service, China Mobile and its 2 rivals, China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA), are having to look for other revenue sources beyond simply signing up new customers.

All 3 have been rolling out new 4G data services in a bid to rekindle their stalling growth, and China Mobile appears to be finally reaping rewards after receiving its 4G license more than a year before its 2 smaller rivals. Based on my own calculations using company-supplied half-year data, China Mobile’s profit jumped nearly 10 percent to 36.7 billion yuan ($5.5 billion) in the second quarter, marking one of the best gains I’ve seen in years. (company announcement; Chinese article)

China Mobile’s revenue also grew by a relatively healthy 5.8 percent in the quarter to 192.9 billion yuan, though it’s worth noting that growth was slower than the previous quarter. The fact that revenue grew at a far slower rate than profit in this latest reporting period implies that China Mobile’s margins are finally strengthening after years of declines as it fought with its rivals for market share.

China Mobile said that its 4G subscribers now number 429 million, accounting for just over half of its total and a hefty 88 percent of all of its data traffic. The company also noted it reached an important milestone during the first half of the year as revenue from data traffic surpassed traditional business for the first time. That means data has become the company’s single largest revenue source.

China Mobile didn’t report on its average revenue per user (ARPU), which was up 20 percent in the first quarter of the year after years of falling. I suspect the ARPU growth rate probably slowed a bit in the second quarter, though it was probably still up in the 10-15 percent range.

Upside Potential

China Mobile shares rose slightly after the results came out, and are now near a one-year high. The shares now trade at a price-to-earnings (PE) ratio of about 15.5, which is comparable to Unicom but a bit higher than China Telecom’s level of around 13. These latest results do appear to show that China Mobile could be set to finally return to some decent profit growth, meaning its stock could also see some upside potential.

All of that said, I’m still not ready to say China Mobile is my favorite of China’s 3 telcos at the moment. That distinction probably goes to China Telecom, partly because of its lower PE ratio and also because the company appears to be trying some new things under its recently named new chairman.

By comparison, China Mobile is certainly getting aggressive in 4G and is now benefiting from that effort. But the company has always benefited from its market-leading position, with about two-thirds of China’s mobile market. It benefited further by getting a one year head-start over its rivals in 4G, and should be commended for taking full advantage of that lead. Still, the carrier will have to do more outside simply offering data services if it wants to ever have a chance of becoming a true global leader in the mobile telecoms space.

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