My earnings seasons officially kicks off today with reports from leading telco China Mobile (CHL) and former e-commerce superstar Dangdang (DANG), whose third-quarter results are sending a subdued message of stiff competition and slowing growth. Each company is struggling with its own individual issues, but the common theme is that both have missed market expectation by a significant margin. A number of factors are at work that I'll describe shortly, but fierce competition and China's slowing economy seem to be 2 of the biggest issues facing both companies. If this shaky start turns into a trend, we could see other companies reporting similarly disappointing results in the weeks ahead.
Let's start off with China Mobile, which has just posted its weakest profit growth in more than a decade. The word "growth" isn't really quite accurate here, as China Mobile's profit actually slid 8.8 percent in the third quarter. (company announcement; English article; Chinese article) More specifically, China Mobile posted a third-quarter net profit of 28.4 billion yuan ($4.7 billion), down from 31.1 billion a year earlier. Analysts had been expecting that profit would be flat to down slightly for the quarter. Quarterly revenue grew 7.5 percent, also a slowdown from the 10.4 percent growth in the first half of the year.
I've followed China Mobile for a decade, and for most of that it has reported profit growth in the very low single-digit growth range, usually 1-5 percent. Once or twice it has reported a decline, but even then the figures are always quite small. So some might see this sudden big drop as a bit alarming. At least some of the decline is due to the company's aggressive build-up of its 4G network, which will probably launch commercial service later this year.
But the more worrisome profit erosion is coming from competition in the more nimble private sector, as entrepreneurial firms roll out popular "over-the-top" (OTT) services that piggyback on the mobile Internet. Those services can earn money for companies like Tencent's (OTCPK:TCEHY) WeChat, but have much less potential for China Mobile. Such OTT services will only grow in popularity going forward, posing a new challenge for China Mobile and its rival telcos.
From China Mobile, let's look quickly at Dangdang, which has just released some preliminary third-quarter results. This kind of preliminary announcement often contains bad news and is designed to minimize impact by catching investors unprepared. Such is the case this time, with Dangdang announcing its third-quarter revenue will fall short of its previous forecast by about 4 percent. Investors weren't too pleased, with Dangdang's stock tumbling 10 percent in after-hours trade after it made the announcement.
Specifically, Dangdang said it now expects to report net revenue of about 1.52 billion yuan for the third quarter, compared with previous guidance for about 1.58 billion. (company announcement) Dangdang blames the shortfall on the elimination of some low-margin products from its site. Apart from the revenue shortfall, the preliminary results don't really look all that bad to me. Dangdang says that margins improved in the quarter and its net loss was about 28 million yuan. While a loss is never good, that figure is actually quite an improvement from the 100 million yuan loss a year earlier, and 64 million yuan loss in the previous quarter.
I suspect that part of the reason for the big after-hours sell-off was because Dangdang's stock has tripled since May on hopes it may soon return to profits. Thus this revenue miss was a good excuse for investors to pocket some of those gains. Still, the shortfall does show that competition in the sector remains fierce, and that other firms may soon join Dangdang in reporting weaker-than-expected results.
Bottom line: Weak results from China Mobile and Dangdang reflect stiff competition and slowing growth for many firms, which could be repeated in upcoming results of other companies.