China Mobile Faces Declining Profits In 2014

| About: China Mobile (CHL)
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The headlines are swamped today with news about leading wireless telco China Mobile (HKEx: 941; NYSE: CHL), after Chairman Xi Guohua spoke an event in Guangzhou where he gave details on a wide range of issues as the carrier formally launched its new 4G service. I don't usually discuss the bottom line until the end of my posts, but with so much news and new data in the headlines, this time it does seem better to start here with that assessment. In this case it's safe to say that China Mobile will embark on a massive spending spree to promote 4G in 2014, meaning we're likely to see declining profits for much or all of the year.

The next question would be: Is this a good thing or a bad one? In my view it's almost definitely a positive development. China Mobile is already awash in cash and never knows how to spend it. Its global expansion in nearly non-existent, and it repeatedly refuses to give out a greater share of its huge cash pile to investors with a larger dividend payout ratio. So this new 4G spending extravaganza will finally give it a way to spend some of its hoarded cash, potentially with big returns.

All that said, let's start off this China Mobile news round-up with a look at some of the big-picture targets for its new 4G service, after its receipt of a 4G license earlier this month. In my view, the biggest news among the many headlines is Xi's announcement that China Mobile aims to sign up 100 million 4G users next year, and to sell a similar number of handsets for its older 3G service (English article). Both services are based on a homegrown Chinese technology known as time division or TD.

To put those numbers in perspective, China Mobile currently has just 176 million 3G customers, even though it rolled out the service more than 3 years ago. In order to meet its aggressive targets, the company has budgeted a massive 30 billion yuan, or about $5 billion, for handset subsidies next year. It will offer the subsidies on a wide range of service plans with 200 handsets it has developed for its 4G network, which is based on the TD-LTE standard.

One of those new handsets is likely to be a TD version of Apple's (Nasdaq: AAPL) iPhone 5s. But Apple fans who were hoping for announcement of an iPhone-China Mobile deal at the Guangzhou event were disappointed, as Xi said such an agreement has yet to be finalized (English article). Other sources indicated the 2 sides have reached a larger framework agreement, but are still working out final details on a deal that would make China Mobile the last of China's 3 major telcos to officially offer iPhones.

Last on this China Mobile round-up is word that the company has finally submitted its list of 17 potential partners as part of the country's new virtual network operator pilot (VNO) plan. The nation's other 2 telcos, China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA), have already submitted their lists. The VNO scheme will create 6-12 new telecoms service providers next year by allowing licensees to lease network capacity from the big 3 telcos.

So what do I think of all this? I do expect the iPhone deal to finally come next year, though perhaps we'll have to wait until after the Chinese New Year holiday. I think the VNO program will probably get off to a rocky start after new service providers are announced around April, and these new companies won't pose any meaningful competition until 2015 at earliest. One thing that's certain is that 2014 will be a big year of spending for China Mobile, though I suspect it won't be able to meet its ambitious goal of 100 million 4G users by the end of the year.

Bottom line: China Mobile's profits will decline in 2014 as it ramps up spending under its 4G blitz, but it's unlikely to meet its target of 100 million subscribers by year end.

Disclosure: No positions