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China Mobile Limited (NYSE:CHL)

FY07 Earnings Call

March 19, 2008, 12:30 AM ET

Executives

Wang Jianzhou - Executive Director, Chairman and CEO

Li Yue - Executive Director and VP

Lu Xiangdong - Executive Director and VP

Xue Taohai - Executive Director, VP and CFO

Madam Xin Fanfei - Executive Director and VP

Operator

Ladies and gentlemen, good afternoon, welcome to the analyst briefing of 2007 annual results announcement of China Mobile Limited. In today's analyst briefing, the management will first present the results, which then will be followed by a Q&A session.

Please allow me to introduce our management members here today. Mr. Wang Jianzhou, Chairman and Chief Executive Officer; Mr. Li Yue, Executive Director and Vice President; Mr. Lu Xiangdong, Executive Director and Vice President; Mr. Xue Taohai, Executive Director and Vice President and Chief Financial Officer; Madam. Xin Fanfei, Executive Director and Vice President.

Now may I invite Chairman Wang to introduce the annual results of 2007. Mr. Wang, please.

Wang Jianzhou - Executive Director, Chairman and Chief Executive Officer

Thank you, Dong Ge [ph]. Good afternoon, ladies and gentlemen, thank you very much for coming to our 2007 annual results announcement briefing. Our presentation includes two parts, overall performance and financial results in 2007.

Overall performance. We're happy to announce a set of remarkable results for 2007. Revenue grew 20.9%; net profit, up 31.9%. Rapid subscriber growth sustained with an average monthly net adds exceeding 5.67 million. Value-added business developments were strong. Proportion in total revenue rose to 25.7%. Rural market exhibited a strong growth momentum, contributing nearly half of the subscriber growth. Full year dividend for 2007 was HK$1.997 per share. Full year special dividend was HK$0.101 per share.

2007 marks another year of record-breaking results as shown in the table compared with 2006. Our total subscribers reached 369 million, increased by 22.6%. Operating revenue grew 20.9% to 357 billion yuan. EBITDA, up 21.6% to 194 billion yuan. EBITDA margin continued to stand at a high level of 54.3%. Net profits grew 31.9% to 87 billion yuan. Net profit margin enhanced by 2 percentage points to 24.4%. Basic EPS increased by 31% to 4.35 yuan.

Our subscriber base continued its rapid expansion. Net adds exceeded 68 million with a market share of 79%. Total subscribers reached 369 million, picking up 69% of the whole market. While we continued to see growth in the affluent eastern region, significant results were achieved in realizing market potential in the central region, and the western region was even more pronounced. Subscriber base further expanded. Our strong growth momentum has furthered into 2008 with net adds hit 7 million in this January for the first time.

In 2007, voice business continued to grow by sticking to successful sales and marketing strategy. We utilized various promotional measures and price elasticity, effectively stimulated voice traffic and pushed forward our voice business developments. Total voice usage volume has reached 1,819 billion minutes.

Apart from voice business, our value-added business performed strongly with significant contribution in 2007. Value-added business revenue grew 32.2% to 91.6 billion yuan. Its contribution to total revenue has raised to 25.7%. Despite its high revenue contribution, SMS revenue continued its growth and reached 41.9 billion yuan. Non-SMS data business developed rapidly, in particular Color Ring, WAP, and MMS have achieved significant scale with increasing revenue contributions. Their respective growth rates were 75%, 32%, and 59%. As one of the drivers of our strong development, value-added business continued pulling revenue growth.

There is prosperous development of our VAS products. Mature data product continued showing that growth momentum. We have adopted various promotional values [ph] that have effectively boosted SMS usage as well as unleashing the enormous potential of products like Color Ring, WAP, and MMS. Meanwhile, the business scale of key products such as Mobile Music, Mobile Paper, and Fetion contributed to... continued to expand, exhibiting impressive growth trend and having become the new growth sources of the company. For example, paying subscribers of Mobile Paper increased 18 million to 23 million.

We have formed a stratified data product mix comprising potential products, growth products, key products, and mature products by spending efforts in different aspects. To begin with, we have strengthened new product developments, conducted customer demand study, and formulated a product design standard. Our… this cost rise in the international standard of setting process has also increased.

We ceaselessly developed new mechanism for product promotion. We conducted a product pilot test at provincial subsidiary level and once proven successful. Nationwide, the promotion will be launched. This mechanism helps to speed up product scale expansion while effectively reduce the risk and cost. In addition, we forced our stronger partnership with all kinds of partners with a view to achieving win-win situation in the value chain.

We have always noted the importance of our corporate customer market. We earnestly built and optimized our corporate customer operation system. In order to satisfy customer demand for mobile office, production monitoring, and service management, we strengthened the effort to promote informatization solutions and industry-specific applications based on mobile terminals. Various application series in society-focused areas such as rural development, education, and environmental protection, etcetera, have been launched and already reached certain scale. End-to-end business in the field of electricity, transportation etcetera has achieved scale expansion. As a result, the number of corporate accounts has increased to 2.12 million; registered subscribers on the corporate account reached 29.2% of our total subscriber base.

Let's move to rural market developments, one of our key developments in the past several years. In 2007, rural market continued at nearly half of our subscriber growth. We adhered to our rural-specific sales and marketing strategy to drive market growth and realize economies of scale. While our network coverage and distribution channels in rural areas have been enhanced, we service our rural market with urban-based customer service and business support, shaping up our overall competitive advantages. We further promoted rural information service, our nationwide unified information platform provides various kinds of agriculture information, adequately giving support to subscriber scale expansion, enhancing customer stickiness as well as cultivating customer habits to use data service.

Rural mobile penetration is relatively low at about 19%, reflecting enormous potential. Against the backdrop of favorable state policy, faster urbanization, larger migratory population together with higher rural living standards, lower handset prices, and the promotion of rural information, we believe the rapid growth rate of rural market will sustain.

ARPU. ARPU for 2007 was 89 yuan, slightly declined over that of 2006. Our continued revenue growth was contributed by growth in subscribers, voice usage volume, and value-added business as well as rapid development in rural market

On the back of favorable revenue growth and effective cost control and our refined management coupled with better economies of scale, our net profit continued to grow.

CapEx. CapEx in 2007 worth 105 billion yuan. As witnessed in the past, our investments have supported our subscribers voice usage and revenue growth reflecting good investment efficiency. To cope with strong market demand, promote value-added business growth, ensure a leading network advantage and in line with the evolution of new technology. The company has set its CapEx budget for 2008 through 2010 at 127 billion, 119 billion and 109 billion yuan respectively. We will continue to pursue the high CapEx efficiency and realize good investment return for the company.

Dividend. Final dividend for 2007 is HK$1.160 per share. Full year dividend for the year is HK$1.997 per share. In addition, having considered the effect on the net profit resulted from revision of the depreciable life and returns for shareholders, the Board of Directors granted to distribute a special dividend for the full year of 2007. The special final dividend for 2007 is HK$0.016. Full year special dividend for the year is HK$0.101 per share. Having considered various factors including overall financial position, cash flow generating capability, and further sustainable developments, the company plans a dividend payout ratio of 47% for the year of 2008.

We believe that our outstanding operating results and strong cash flow generating capability will support the company's sustainable development while also providing shareholders with a favorable cash return. We will continue to endeavor to achieve a long-term sustainable steady increase in dividend with a view to generating the best possible return to our shareholders.

Olympics. Beijing Olympics is just around the corner and we are ready for it. We will welcome our guests from all around the world with the most advanced technology, the most abundant business offerings, and the most considerable services. The network coverage of sports ground is basically completed and solution to handle instant explosive call traffic at the sports ground are formulated. We have also overcome all difficulties to install the highest-ever base station in the world at a 6,500-meter height above sea level on Mount Everest, Himalayas which facilitated Olympic Torch Relay and successfully enhanced our corporate image.

During the Olympics, we will strengthen our services for international roaming customers. Multilingual customer service hotline as well as handset and SIM card replacement services will also be available through cooperating with media global operators. I will take this precious opportunity to enhance brand imaging and promote business by product innovation, aiming to maximize and convert the Olympic partnership rights into our benefits.

The theme of our corporate social responsibility is growing together harmoniously. We have made a significant contribution to driving rural informatization, eliminating poverty, disaster relief, education assistance, energy conservation, emission reduction, as well as community development. More details are available in our Corporate Social Responsibility Report of 2007.

We endeavor to conserve energy and reduce emissions. In 2007, our Green Box campaign has collected up to 2.6 million pieces of used handsets and batteries. Conservative energy is the core part of our energy conservation and emission reduction campaign.

According to our estimates, if we can reduce energy consumption per business volume unit by 40% in 2010 when compared with 2005, we will be able to save electricity usage by 8 million kilowatt hours in 2005 terms, which is equivalent to the savings of 2.7 million tons of standard coal energy, and… and which is equivalent to the total emission of 1.7 million vehicles running on the road for a year. The launch of energy conservation and emission reduction campaign can further enhance our competitive and overall capability.

Looking ahead, we will continue to drive rural and corporate market developments, exploiting and realizing growth potential in subscriber scale expansion, value-added business, and voice business to further utilize and strengthen our competitive advantages and solidify our leading position in the mobile communications market. Our persistent pursuance in technology, service, and business innovation will enable us to cope with the coverage [ph] while fast-changing value chain and maintain sustainable development.

A lot of work will be done to prepare for the coming of next-generation network and emergence of new technology. We will closely monitor the evolution of LTE with a view to achieving a giant stride in our further business developments.

Now, let me invite Mr. Xue, our CFO, to present the financial results. Thank you.

Xue Taohai - Executive Director, Vice President and Chief Financial Officer

Thank you, Chairman, Wang. Now I'm pleased to introduce the financial results of 2007. China's rapid and stable economic growth, strong telecommunications market demand, continued to create a favorable operating environment for us. Our premier network, strong brand advantages, increasing economies of scale, and efficient refined management enable us to sustain a fast and healthy business growth with impressive financial results. Driven by a three-growth initiative of new customers, new businesses, and new voice usage, we recorded a remarkable revenue growth in 2007, up 20.9% to 357 billion renminbi.

While maintaining the rapid revenue growth momentum, profitability was further enhanced through refined and effective cost control measures, as well as economies of scale. In 2007, EBITDA reached 194 billion renminbi, up 21.6%. Net profit rose 31.9% to 87.1 billion renminbi. The EBITDA margin and net profit margin continued to maintain at high levels of 54.3% and 24.4% respectively. Basic EPS grew to 4.35 renminbi, up 31%. High profitability has demonstrated the company's ceaseless efforts and capability in creating wealth and values for our shareholders.

Favorable business growth, the effective cost control measure, and economies of scale, all contributed to enhancing cash flow generating capability. In 2007, the company has generated 168.6 billion renminbi and 63.5 billion renminbi in operating and free cash flow respectively, laying a solid foundation for the company's healthy growth in preparation for future competition [ph].

Usage fees and monthly fees remained a major revenue component, which account for 69.3% of total operating revenue. We are happy that the value-added business revenue continued to grow rapidly and further optimized revenue composition. In 2007, value-added business revenue rose 32.2% to 91.6 billion renminbi, representing 25.7% of total operating revenue, maintaining strong growth momentum.

Effective voice usage promotion and the development of new subscribers support a stable voice business growth. At the same time, the company also strengthened the promotion of value-added business to create more new sources of revenue growth. Therefore, both voice and data business played an important role in the revenue growth of 61.6 billion renminbi in 2007.

Through refined and effective cost control measures, operating expenses continued to grow at a slower pace than revenue, reflecting favorable economies of scale. Overall, our operating cost was under control. Profitability was further enhanced.

In 2007, with a view to enhancing future competitiveness, the company consistently upheld proactive planning and efficient resource allocation. As such, we increased our investment in sales channel network, R&D, etcetera to provide full support to the company's fast and strong business growth. Cost to revenue ratio declined by 3.7 percentage points and average operating expense per minute dropped 21.2%, reflecting a continuation of economies of scale.

At the end of 2007, our total debt to total book capitalization ratio was 8.7%. Our able cash balance and financial capacity provide business elasticity in capturing future development opportunity and maximizing shareholders return. Furthermore, in July 2007, S&P and Moody's have respectively upgraded our credit ratings to A positive and A1 stable. Again, our strong financial performance, enormous business potential, and prudent financial management discipline have received the market recognition.

That's the end of our annual results presentation. You can refer to the appendices for detailed operating and financial data. Now, we are very happy to answer your questions. Thank you.

Question-and-Answer Session

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Source: China Mobile Limited Q4 2007 Earnings Call Transcript
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