China Mobile (SEHK:0941, NYSE:CHL) is the largest mobile operator in China with 826 million subscribers (2014: 806 million) of which 58.3% are 3G/4G subscribers. This is compared to 287 million (51.4% 3G/4G) subscribers in China Unicom (SEHK:0762, NYSE:CHU) and 197 million (72.3% 3G/4G) in China Telecom (SEHK:0726, NYSE:CHA). China Mobile has leveraged its first mover advantage to build up the largest mobile coverage network in the country, and continues to remain the dominant player. It has historically deployed home-grown technologies (TD-SCDMA and TD-LTE) compared to its competitors (WCDMA and FDD-LTE).
China Mobile has experienced decline ARPU due to the opening of the Chinese mobile market to competition (China Unicom and China Telecom). For example, ARPU declined from RMB90 in 2006 to RMB61 currently. Until 2011, the decline ARPU was mitigated by increasing subscriber base as revenue and EBITDA continued to grow. However, from 2012 to 2014, EBITDA started to decline from RMB154 billion to RMB117 billion. In 2014, China Mobile launched its TD-LTE 4G network, the first in China, and successfully increased its 4G customer base from 90 million at the end of 2014 to 312 million at the end of 2015 (representing ~81% market share). This resulted in a significant increase in mobile data traffic from 1,133 billion MB in 2014 to over 2,400 billion MB 2015 (annualized).
A key business headwind is the introduction of value-added taxes (11% on basic telecom services and 6% on value-added telecom services) in June 2014, superseding a 3% business tax on net sales - this change is expected to impact profitability but has largely washed through by Q3 2015.
Economic headwinds in China also has the ability to dampen earnings in the near term. However, the e-commerce market continues to grow at an explosive pace - online retail sales grew by 33.3% y/y to RMB3.9 trillion in 2015. Furthermore, according to CNNIC, approximately 620 million Chinese use their mobile phones to access the Internet.
China Unicom and China Telecom started offering FDD-LTE 4G services in China in February 2015, and the two competitors signed a strategic deal to jointly build up networks in early 2016, as the deployment of 4G proved to be a challenge for the smaller competitors. We believe that China Mobile's domestically developed wireless technologies will always be favored by the authorities, giving it a head start to next-generation deployments.
In October 2014, the three major mobile operators contributed all their tower assets into a joint-venture, China Tower. As part of the transaction, China Mobile will contribute RMB92.5 billion (book value) of towers to the joint-venture and, in return, receive 38% stake (single largest shareholder) in the joint-venture plus RMB57.6 billion in cash (RMB 6 billion payable now and the remaining by end 2017). This reduces the company's PP&E by 14% and increases its cash position from RMB451 billion to RMB509 billion.
In November 2015, China Mobile acquired assets of Tietong from its parent (CMCC) for RMB34 billion TEV. Tietong, formerly Railway Communications, is China's third largest fixed line ISP behind China Telecom and China Netcom. Tietong generated RMB23 billion of revenue and RMB7 billion of EBITDA in 2014.
In China, we prefer China Mobile due to its market share leadership, strong cash flow, pristine balance sheet, as well as long-standing investments into domestic wireless technologies.
China Mobile (pro forma for the tower transaction) is currently trading at about 4x LTM EV/EBITDA, whereas Asia mobile and telecom operators trade an an average of 6-7x. The company has a net cash position of nearly RMB450 billion (over RMB 500 billion if pro forma for the tower transaction).
Long China Mobile shares at HK$83.00 (5.1% from its 52-week low) with a stop loss at HK$78.00.
Catalysts
- ARPU and profitability turnaround driven by 4G and development of mobile commerce in China
- Potential special dividend (cash at HK$24 per share, including cash to be received from the tower transaction) due to significant cash pile
- Unlocking of value from the tower business (assuming USD100,000 EV/tower, HK$4.75 per share will be "unlocked")