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China Mobile Limited (NYSE:CHL)

FY08 Interim Results Call

August 27, 2008, 01:30 AM ET

Executives

Wang Jianzhou - Executive Director, Chairman and CEO

Xue Taohai - Executive Director, VP and CFO


Presentation

Unidentified Company Representative

Good afternoon, ladies and gentlemen. Welcome to the 2008 interim results announcement briefing of China Mobile Limited. In today's briefing, our management will first report the results, and then Chairman Wang will give you an update on TD before the Q&A session.

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

Now, may I invite Chairman Wang to introduce the interim results? Mr. Wang, please.

Wang Jianzhou - Executive Director, Chairman and Chief Executive Officer

Thank you, Dong Jie [ph]. Good afternoon, ladies and gentlemen, welcome to our 2008 interim results briefing. In today's presentation, I will present the overall performance and Mr. Xue will walk you through the financial results after which I will come back again to talk about the issue of TD-SCDMA.

Overall performance. In the first half of the year, despite the natural disasters including snowstorms, earthquake, and flood, we achieved remarkable results. Revenue grew 17.9%, net profit up 44.7%. Rapid subscriber growth sustained with an average monthly net adds exceeded 7.5 million. Value-added business developments were strong. Proportion in total revenue rose to 27%. Rural markets exhibited strong growth momentum, contributing nearly half of our subscriber growth.

Ordinary interim dividend for 2008 was 1.339 Hong Kong dollar per share, increased 60% over the same period of the last year. Our planned full-year dividend payout ratio is 43%.

As shown in the table, compared with the same period of last year, our total subscribers reached 415 million, increased by 24.7%. Operating revenue grew 17.9% to 196.5 billion yuan. EBITDA, up 16.2% to 104.4 billion yuan.

EBITDA margin continued standing at a high level of 53.1%. Net profit grew 44.7% to 54.8 billion yuan. Net profit margin enhanced by 5.1 percentage points to 27.9%. Basic EPS increased by 44.2% to RMB2.74 yuan.

Rapid growth of subscriber continued with net adds reached 45 million and a net add market share of 85%, taking our total subscribers to 415 million. We believe there remains vast potential for the future. Development of China's mobile market providing us room to further expand in a new competitive landscape.

Voice business continued to grow in the first half of the year, following a successful sales and marketing strategy. We utilized various promotional measures and price elasticity, effectively stimulated voice traffic and pushed forward our voice business development. Total voice usage volume has reached 1,160.5 billion minutes and voice revenue was 143.5 billion yuan.

Value-added service. Value-added business achieved strong growth and made a significant contribution in the first half of the year. Value-added business revenue grew 26.4% to 53 billion yuan, accounting for 27% of our total revenue.

Despite these high revenue contributions, SMS revenue continued its growth and reached 24.2 billion yuan. Non-SMS data business developed rapidly; in particular, ring back tone, Color Ring, WAP, and MMS have achieved significant scale with increasing revenue contribution. Their respective growth rates were 25%, 19%, and 91%.

As one of the major drivers behind our strong development, value-added business continued driving revenue growth. In the first half of the year, we carried out different sales and marketing activities and successfully sustained the SMS business growth. Usage of other businesses such as Color Ring, WAP, and MMS also grew rapidly, turning their high potential into economic benefits.

Mature products show a trend of continuous growth. At the same time, the industry value chain of mobile music continues to expand. Mobile paper business witnessed a strong growth and its monthly revenue has surpassed 100 million yuan since May this year. Fetion, its share has leaped to third in Chinese IM market. These key data products have already reached a moderate scale, demonstrating accelerated development momentum and becoming a new source of growth of us.

In the first half of the year, along with the strengthened development of Mobile Media products such as Mobile Music, Mobile [inaudible], we have actively reinforced innovation and extended product reserves to enhance multi-uses of mobile phones.

We have also stepped up efforts on promotion for products related to information, Mailbox and gaming, etcetera. For instance, our integrated information service provides customers a wide variety of daily life information and recorded more than 60 million times of enquiry in the first half of the year.

Our Mailbox products allow users to send and receive e-mails anytime, anywhere. For mobile gaming, we continuously introduced the quality game content. In the month of June, Mailbox and mobile gaming subscribers exceeded 5 million and 2 million respectively.

In the first half of the year, rural market has contributed nearly half of our subscriber growth. While we furthered our rural market expansion, the company margins continued to stand at a high level, reflecting the significance of rural market to our overall results. Low penetration in rural markets indicates that it’s still in a high growth stage. Rising rural income will expand the number of mid-to-high-end rural customers. Continuous development in rural economy creates different needs for mobile communication, which increases penetration of new business and applications.

Favorable rural policy, fast urbanization, together with a stable economic development provide us free search development opportunity. With our low cost of sales and marketing strategy and through continuous expansion in economies of scale, rural market will remain a driver to our sustainable growth. It is one key factor enabling us to maintain a good fundamental when we face the new competitive landscape.

Our revenue reached 196.5 billion yuan in the first half of the year. The continuous revenue growth was attributed to the growth in subscribers, voice usage volume, and value-added business as well as rapid development in rural market. As the majority of our new subscribers are low-end users, the ARPU decreased to 84 yuan.

On the back of favorable revenue growth and effective cost control and our refined management coupled with better economies of scale and a solid financial policy, our net profit contributed to growth. It is worth noting that the reduction in income tax rates is also an important factor of boosting our profit growth in the first half of the year.

In order to meet a strong market demand, promote continuous development of value-added business, sustained leading network advantage, cope with the challenges of new-generation technology, and assure post-disaster reconstruction, the company has made appropriate investments. CapEx incurred in first half of the year were 65.5 billion yuan due to the reasons of post-disaster reconstruction in Sichuan. The company has made appropriate adjustments to its CapEx budget for the year, which will be controlled within 8%.

As witnessed in the past, our investments have supported our subscriber voice usage and revenue growth, reflecting good investment efficiency. Ordinary interim dividend for 2008 is 1.339 Hong Kong dollar per share, which is up 60% compared with the same period of last year. We believe our outstanding operating result and strong cash flow generating capability will support the company’s sustainable development while also providing shareholders with a favorable cash return.

We will continuously endeavor to achieve a long-term, sustainable, steadily increasing dividend with a view to generating the best possible return for our shareholders. We have captured an opportunity of this Olympics and enhanced the overall capability of the company.

A market survey showed our brand recognition as an Olympic partner and positive comments on our Olympic publicity, both rated number one among all official partners. Most respondents think Olympic sponsorship has the greatest impact on China Mobile's brand than other sponsors.

The launch of the key Olympic products has driven the development of Mobile Media business, Mobile TV business has gained widespread popularity. Within the 26 hours after the opening ceremony, the Beijing Olympics theme song, You and Me, had a stunning 5.7 million times of download, and today, it becomes near 10 million downloads for the Olympic Games... Olympic Song.

We arranged key corporate accounts to experience our Olympic product and provided them customized solutions. Our considerate service has enhanced the corporate customer satisfaction. Besides that, broadband technologies have been widely used in this Olympics. Our parent, TD-SCDMA, has this debut [ph] service for Olympics.

With our advanced network plan, we managed to satisfy the huge demand during Olympics. At the opening ceremony venue, the peak traffic reached 110,000 calls per hour, which is double the peak mobile call traffic recorded at the previous Olympic Games and is the highest in Olympic history.

A joint announcement regarding telecom industry restructuring has been issued on May 24 by the relevant regulatory authorities. It means we will see some changes in our operating environment and a new competitive landscape. We think telecom industry is a service industry, driven by domestic demand and consumption with an attribute of the [ph] brand readiness its influence in the macro economy will continue to rise going forward.

Therefore, our market is still with a lot of potential and self-innovation is essential in building an innovation-oriented country. The central government will fully support us moving towards this direction. Besides, they also encourage enterprises to enhance international competitiveness, adequately supporting our long-term development.

After years of efforts, we have established a leading market position, clear competitive advantage in various aspects, a longstanding mobile focus position, first-mover advantage in value-added business market, and a solid financial foundation. Besides, we have cultivated a competitive soft power such as corporate governance, corporate culture, staff quality, and execution [ph] capability, etcetera. All of these reflect our increasingly strengthened integrated capability, favorable external environment together with internal capability will continue to push forward our rapid development, creating the best return for our shareholders.

And let me pass the floor to our CFO, Mr. Xue.

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

Thank you, Chairman Wang. Now, I'm pleased to introduce the company's financial results of the first half of 2008. Stable economic growth of China and continued strong market demand for telecommunication services continued to create a favorable operating environment for us. In the first half of the year, natural disasters such as the snowstorm in Southern China and earthquake in Sichuan Province, etcetera, presented a severe challenge to our services.

With the efforts of our staff, our high-quality network, strong brand advantage, increasingly notable event of economies of scale, and the efficient refined management, we overcame the difficulties and maintained a fast, healthy business growth and sustained a favorable financial result.

Driven by three growth initiatives namely new customers, new businesses, and new voice usage, we have just seen a revenue growth in first half of 2008, it is up 17.9% to reach RMB196.5 billion.

While maintaining the revenue growth, profitability was further enhanced through refined and effective cost control measures as well as economies of scale.

In the first half of 2008, EBITDA reached RMB104.4 billion, up 16.2% over the same period of last year. Net profit rose 44.7% to RMB54.8 billion. EBITDA margin and net profit margin continue to stand at high levels of 53.1% and 27.9%, respectively. The reduction of PRC Enterprise income tax rate this year and a change of depreciable asset lives in the same period of last year had positive impact on net profit growth of first half of this year.

Basic EPS grew to RMB2.74, up 44.2% in the first half of 2008. High profitability has demonstrated the company's ceaseless efforts and capability in creating wealth and values for our shareholders. Favorable business growth, effective cost control measures, and economies of scale, all contributed to enhancing cash flow generating capability.

In the first half of 2008, the company generated RMB99.6 billion and RMB34.1 billion in operating and free cash flow, respectively, laying a solid foundation for healthy, sustainable growth in preparation for future competition.

Usage fees and monthly fees remained the major revenue components, which accounted for 68.3% of total operating revenue. Value-added business revenue continued to grow rapidly, further optimizing the revenue composition. In the first half of the year, value-added business revenue rose to RMB53 billion, up 26.4% over the same period of last year, representing 27% of total operating revenue. Our value-added business has maintained a favorable growth momentum.

Effective voice usage promotion and a development of new subscriber support a stable voice business growth. At the same time, the company also strengthened the promotion of value-added business to expand our source of growth. Voice and data businesses, both played an important role in the revenue growth of RMB29.9 billion in first half 2008.

Through refined and effective cost control measures, operating expenses continued to grow at a slower pace than revenue. It reflected a favorable impact of economies of scale. Overall operating cost was under good control and profitability was further enhanced.

In the first half of 2008, with a view to enhancing future competitiveness, the company consistently upheld proactive planning and efficient resources allocation principles. As such, we increased our investment in sales channel, network, and R&D to provide full support to the company's strong business growth.

Compared with the same period of last year, our cost-to-revenue ratio decreased 3.5 percentage points, average operating expense per minute decreased 20.1%, and average monthly operating expenses per user decreased 9.9%, reflecting continuous effect of economies of scale.

At the end of June 2008, our total debt to total book capitalization was 8%. Our improved cash balance and financing capacity provide us the flexibility in capturing future development opportunity and maximizing shareholders' return. Furthermore, in July 2008, Standard & Poor's has upgraded our credit rating to… A [ph] to A+ and ascribed with it a stable outlook. It is another proof that the company has been highly recognized by the market for its strong financial performance, enormous business potential, and proven financial management.

This is the end of my presentation and for more details of operating and financial detail, you can refer to the appendices attached at the back.

Question-and-Answer Session

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