Shares of China Mobile (CHL) fell 5% on March 21 after the company posted its annual report for 2018. Its operating revenue rose 1.8% to 736.8 billion RMB ($110 billion). Within that total, its telecommunication services revenue grew 3.7% to 670.9 billion RMB.
China Mobile's EBITDA rose 1.9% to 275.5 billion RMB ($41.1 billion), and its net profit improved 3.1% to 117.8 billion RMB ($17.6 billion). However, 13.9 billion RMB of that net profit came from the IPO of China Tower, which acquired China Mobile's towers over three years ago last August. Excluding that one-time gain, its net profit would have declined 9%.
China Mobile stated that 2018 was a "challenging year" for Chinese telcos, due to competition, the saturation of the smartphone market, and government-enforced reductions of wireless fees and the elimination of data roaming charges. Higher spending on ongoing 5G network upgrades also throttled its earnings growth.
However, China Mobile remains the largest wireless carrier in China, and its status as a state-backed enterprise limits its downside potential. The stock also trades at just 12 times earnings and pays a yield of nearly 4%. Do those factors make China Mobile a compelling investment for conservative investors?
A growing user base
China Mobile's total mobile users grew 4% to 925 million in 2018. Within that total, its number of higher revenue 4G customers rose 10% to 713 million. Its wireline broadband customers climbed 39% to 157 million.
That growth continued this year, with its mobile users rising to 929 million, its 4G users hitting 719 million, and its broadband customers reaching 164 million by the end of February. Those numbers indicate that the market leader still has room to grow.
China Telecom's total mobile users rose 21% to 303 million in 2018, its 4G customers climbed 33% to 242 million, and its broadband customers grew 9% to 146 million. China Unicom's total mobile users rose 11% to 315 million, its 4G customers rose 26% to 220 million, and its broadband customer base grew 6% to 81 million. Both telcos posted growth in all three categories in the first two months of 2018.
Last year, the Chinese government reportedly considered merging China Telecom and China Unicom to create a bigger rival for China Mobile in the wireless market. That merger could threaten China Mobile, but competition between the big three carriers is carefully regulated (with rotating management and controlled prices), and it might be easier for China Mobile to compete with a single carrier instead of two.
Declining revenue per user
China Mobile's user growth looks solid, but its mobile ARPU (average revenue per user) declined 8% to 53.1 RMB ($7.90) for the year due to the aforementioned fee reductions and the elimination of data roaming charges. Its ARPU per 4G user fell 8% to 61.3 RMB ($9.15).
This caused its total consumer mobile service revenue (over two-thirds of its top line) to decline 2%. Within that total, a 55% increase in its mobile data revenue failed to offset a 27% drop in voice and SMS revenue.
Moreover, higher data usage rates (which rose from 1.7GB per user to 4.3GB between the end of 2017 and 2018) increased China Mobile's operating expenses as the government capped its subscription prices. This could make it tough for the company to grow its earnings in 2019.
Other irons in the fire
On the bright side, China Mobile's household broadband blended ARPU rose 3% to 34.4 RMB ($5.13). That growth, which complements its growth in broadband users, could give China Mobile more bundling opportunities between its wireless and wireline plans.
Its Internet of Things (IoT) business -- which offers wireless connections to cars, wearables, smart home devices, and other connected gadgets -- is also growing. Its total number of IoT smart connections surged 141% annually to 551 million, and its IoT service revenue rose 40% to 7.5 billion RMB. That only accounted for 1% of China Mobile's top line, but its weight could significantly increase as the country's IoT market expands.
China Mobile will also benefit from the ramp up of 5G technologies across China. Those upgrades are weighing down its near-term margins, but they'll eventually reduce its data costs and allow it to generate more revenue per user over the long term.
Still a rock-solid business
Investors seemed disappointed by China Mobile's dependence on the China Tower IPO for earnings growth and its declining mobile ARPU. However, those headwinds are temporary, and it remains one of the safest long-term plays on the Chinese market. Its stock probably won't rally much higher this year, but its low valuation and high yield could convince patient investors to stick around.