China Mobile recently announced strong financial results for 2005. Total revenue rose by 26.3% to RMB243 bn, net profit increased by 28.3% to RMB 53.5 bn. Growth came from both acquisitions and fast growing new businesses. Average revenue per user or ARPU dropped from RMB92 in 2004 to 90 in 2005. This is an expected trend in a rapidly growing cellular voice business. We believe that revenue will not drop rapidly because of strong growth in new subscribers, volume of users and other new services.
Growth came from both acquisitions and new businesses
The company acquired 10 provincial subsidiaries from its parent company in 2004; as a result, revenue and net income of those 10 subsidiaries was consolidated for the whole year 2005. Since the company owns all 31 province level subsidiaries from its connected party, there are no risk free acquisitions for the future. China Mobile can go on acquiring businesses outside mainland, for example, Resources Peoples in Hong Kong, but this is not without risk. Without the boost from acquisition, the company’s growth rate in 2006 may not be as high as 2005.
We still believe the company can grow in 2006 because of rapid expansion in new business. In 2005, new business revenue amounted to RMB50.2 bn, which contributed 21% to total operating revenue, compared to 15.5% in 2004. We believe it is good to counteract price competition in the voice business.
ARPU decreased, but voice business will not drop rapidly
Competing against China Unicom (ticker: CHU), China Mobile discounted voice packages very frequently in 2005, for example, the company’s Shanghai subsidiary lowered M-Zone package price twice in 2005. Therefore ARPU continued its downward trend to RMB90. This situation continues. On March 3, 2006, the Shanghai subsidiary launched another package in which ‘Shenzhouxing’ user can merely pay RMB6 to cover all voice receiving charges.
Test of TD-SCDMA
At the beginning of March China Mobile joined the first massive test of TD-SCDMA in Xiamen with China Telecom in Baoding and China Netcom in Qingdao. Test results will be announced at International TD-SCDMA Summit in June. We note that the government paid for all equipment in the test. This should alleviate the concern that China Mobile has been spending too much on 3G. Based on government’s strong position on TD-SCDMA we believe such funding will continue.
Recommendation - Buy
China Mobile posted strong financial results in 2005. While voice business faced price competition last year, new businesses are growing fast. Buy up to our target price of $30.