TELECOMS: China Mobile Turns Rocky Corner On 4G
Bottom line: A recent stabilization of China Mobile’s profits and revenue per user could be short-lived, and declines could resume and accelerate later this year as its rivals ramp up their 4G promotions.
Telecoms juggernaut China Mobile (HKEx: 941; NYSE: CHL) passed an important milestone in its latest quarterly results, posting its first increase in years for average subscriber revenue on strong gains for its new 4G service. But that milestone was partly offset by weakness in data services, its biggest future growth engine, hinting that the turning point for average revenue per user (ARPU) may be short-lived.
Of course we’ll have to wait for later quarterly results to see if China Mobile can continue to improve its revenue per subscriber, which will be critical to the company’s future as the Chinese mobile market rapidly approaches saturation. I wouldn’t be surprised if the figure start to erode again by the end of the year, due to stiff competition from rivals China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU), which are just starting to aggressively promote their own new 4G services.
China Mobile’s business appeared to stabilize and even improve slightly in its latest reporting quarter, putting the brakes on more than a year of sliding profits and sluggish revenue growth. But that stabilization could owe largely to a one-year head-start in 4G that the company received as a gift from the telecoms regulator.
The Ministry of Industry and Information Technology (MIIT) granted China Mobile its 4G license at the end of 2013 to give it extra time to work out issues with the homegrown technology it was using in its network. It delayed giving similar licenses to Unicom and China Telecom for a year, allowing China Mobile to sign up 143 million 4G users by the end of March, according to its latest report. (company announcement) But now that grace period has ended, and Unicom and China Telecom have indicated they will aggressively try to build up their own 4G business following recent receipt of licenses.
All that said, let’s look more closely at China Mobile’s first quarter results, which show its monthly ARPU actually rose to 59 yuan ($9.60) per user from 58 yuan a year earlier. That marks a sharp improvement from all of 2014, when the company’s monthly ARPU fell to 61 yuan from 67 yuan in the previous year.
The stabilizing revenue per customer will be critical in the years ahead, since nearly all of China’s 1.3 billion people now have mobile service. That means the only way for the telcos to keep expanding their revenue will be to get existing customers to spend more money each month. That’s different from the past, when carriers could depend on signing up new users to offset declining spending per customer.
Among the other figures in its latest report, probably the most significant was a 20 percent rise in mobile data traffic, which reached 490 billion megabytes for the quarter. But despite that gain, the average data use by individual subscribers actually dropped. What’s more, the 20 percent growth rate was down sharply from last year, when the figure more than doubled. In one other slightly upbeat sign, China Mobile’s profit erosion seemed to slow, falling 5.6 percent in the latest quarter versus a 10.6 percent decline for all of 2014.
The stabilization of individual user revenue and profits seemed to excite investors, who bid up China Mobile shares by 7 percent in early trade after the report came out. That gain means the stock is now up 60 percent over the last 52 weeks, which seems a bit overstated due to the company’s uncertain future as rivals step up their 4G campaigns. As that happens there’s a good chance the profit and ARPU erosion will resume later this year, and that China Mobile shares could be due for a pull-back.
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