There's no doubt that China Mobile's (NYSE:CHL) metrics are stunning. The company added 5.5 million subscribers last month alone, bringing the total to a touch more than 332 million. Not surprisingly, the company's huge presence and growth story have led investors to go gaga over the stock, and it has spiked more than 100% over the past year. Yet for Foolish investors, there are still some risks lurking beneath the nimble giant.
While the growth ramp is nice, keep in mind that China Mobile is now focusing on rural markets to keep things revving. The focused expansion into rural Chinese markets will be a drain on the company's average revenue per user, or ARPU. The company's monthly ARPU for 2006 came in at a flat $11.70.
Things are much different with the major U.S. carriers, where ARPU numbers are much higher and enjoying growth. AT&T (NYSE:T), Sprint (NYSE:S), and Verizon Wireless -- a joint venture between Verizon Communications (NYSE:VZ) and Vodafone (NYSE:VOD) -- have ARPUs that range from $49 to $57 or so. The big boost for these companies has been the surge in data services, such as email, Net access, games, and so on. In the context of China Mobile's rural growth designs, ask yourself whether farmers really need to play games or surf the Net.
A recent study from the Pew Internet & American Life Project sheds some light on this. It estimates that about half of China Mobile's 2006 subscriber additions were rural customers. And about 85% of the Chinese say they have no plans to use Net-type features, with much of the resistance coming from rural users.
Just take a look at the Indian mobile market. While the subscriber numbers are tremendous, it's still tough to get much traction on ARPU. I suspect this is a natural characteristic for developing nations.
Despite this, it looks like China Mobile has ambitious plans to build a sophisticated 3G network. How much? It's unclear. But it's not going to be cheap.
In fact, according to China Mobile's own estimates, there will need to be about $29.4 billion in capital expenditures from 2006 to 2008 for such things as new networks, support systems, and Net technologies -- but this does not include the construction costs for a massive 3G network.
Another prickly issue is trying to predict the maneuverings of the PRC Ministry of Information. There's little doubt that the PRC believes that mobile is highly strategic and will be protective of the industry.
But this doesn't mean the PRC will favor only China Mobile. Perhaps there will be more incentive to try to enhance the positions of other operators -- namely, China Unicom (NYSE:CHU). Doesn't it make sense to have a broader corporate base for the mobile footprint?
For example, the Chinese government may allocate frequency spectrum to rivals. This would ultimately limit the growth capacity of China Mobile and be a headache for investors who are betting on growth.
The Chinese government has already provided favorable regulatory policies to China Unicom. The company got a nice tariff benefit to make it easier to snag price-sensitive subscribers.
There is also anxiety that the Chinese government will require China Mobile to provide low-priced or free mobile services to remote areas. This would be good for the country, but could be costly for China Mobile.
I'm not implying that China Mobile will collapse. On the world telecom stage, the company is a powerhouse and will stay a player for the long haul. But for Foolish investors, there are clear risk factors, including weak ARPU, uncertainty on government policy, and the huge costs of infrastructure. And with the frothy investor sentiment toward the stock, it's probably a good idea to be cautious when looking at the company as an investment.
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Fool contributor Tom Taulli does not own shares mentioned in this article. China Mobile is a Motley Fool Global Gains recommendation. Vodafone is an Inside Value pick. The Motley Fool has a disclosure policy.
