Shares of China Mobile (CHL), China's largest wireless carrier, fell 3% on Oct. 23 after the company posted its interim report for the first three quarters of 2018. Investors seemed unimpressed by the telco's anemic growth during the period, but the stock remains up about 8% over the past three months even as other Chinese stocks tumbled on concerns about an escalating trade war and rising interest rates.
I recently explained how China Mobile weathered the sell-off in Chinese stocks: It's a defensive play with no exposure to the US market, its core business generates slow but stable growth, it pays a solid dividend, and it trades at low valuations. Today, I'll highlight the key takeaways from China Mobile's nine-month report.
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916 million mobile customers
China Mobile added 10 milion mobile customers during the third quarter, and ended the three-quarter period with 916 million mobile customers. 4G customers accounted for 75.9% of its total customer base during the nine-month period, compared to 74.7% during the first half of 2018.
For comparison, China Telecom (CHA) had 291 million mobile subscribers at the end of August, while China Unicom (CHU) served 310 million mobile subscribers at the end of September.
Higher usage, tougher competition
The Chinese government forced all three state-backed telcos to lower their wireless fees and eliminate data roaming charges earlier this year in an effort to increase mobile penetration in lower income and rural areas.
That decision caused China Mobile's average revenue per user (ARPU) per month to decline from 58.1 RMB ($8.38) in the first half of 2018 to 55.7 RMB ($8.03) in the first three quarters. Meanwhile, its data traffic, SMS usage, and voice usage all surged -- which took a bite out of China Mobile's revenue growth.
China Mobile added 12 million wireline customers during the third quarter, bringing its total wireline customer count to 147 million. However, its wireline customers only generated an average monthly ARPU of 34.3 RMB ($4.94) during the first nine months, representing a slight dip from 35.0 RMB ($5.05) during the first half of the year.
China Mobile's slowdown was exacerbated by tougher competition from China Telecom and China Unicom, which seem to have more support from the Chinese government. Back in September, several reports claimed that the government could merge China Telecom and China Unicom into a more effective competitor, and regulators subsequently launched an antitrust probe into China Mobile over claims of "market domination".
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Soft but steady growth
Between the first nine months of 2017 and 2018, China Mobile's total operating revenues dipped 0.3% year-over-year to 567.7 billion RMB ($81.8 billion). But on an adjusted basis, which applies a new revenue recognition standard to both periods, its revenue rose 1.7% annually.
Within that total (on the same adjusted basis), its Telecommunications Services revenue rose 3.5% annually, but most of that growth was offset by a 14.3% decline in its Products and Others segment.
During the same period, China Mobile's EBITDA rose 1.3% annually to 214.1 billion RMB ($30.9 billion), and its EBITDA margin rose 60 basis points to 37.7%. Its pre-tax profit rose 2.2% to 122.4 billion RMB ($17.6 billion), and its net profit rose 3.1% to 95 billion RMB ($13.7 billion). Its net profit margin also rose 50 basis points to 16.7%.
However, China Mobile's bottom line growth was mainly attributed to a one-time gain from the recent listing of China Tower instead of significant improvements to its core business -- which remains under significant pressure.
The road ahead
China Mobile admitted that it faces "severe adversities resulting from stiffening market competition, a rapid decline in data value and a significant reduction in revenue subsequent to the cancellation of data roaming charges," but also stated that it had "made prompt adjustments to its business strategy and actively responded to market competition."
As a China Mobile investor, I think most of the damage from the aforementioned headwinds has already been done, and it should remain China's top telco for the foreseeable future. Looking ahead, the ramp up to 5G should help China Mobile boost its revenues per customer again, and its growing wireline customer base should give it more bundling opportunities. Therefore, I think China Mobile remains a solid, conservative play on China's massive mobile market.
