China Mobile continues to lead the Chinese wireless market in terms of market share as well as monthly 3G/4G subscriber additions. The carrier added over 7 million 3G and 2 million 4G subscribers in April, compared to the combined tally of less than 3 million by rivals China Unicom and China Telecom in the same period. The wireless major enjoys a dominant share of 62.4% in the country’s wireless market, reporting an improvement of 20 basis points in the last three months. It is followed by China Unicom and China Telecom with 23% and 14.5%, respectively. China Mobile’s total wireless subscriber base at the end of April was 784.6 million, including about 237 million high speed (3G & 4G) users.

The 3G subscriber adds were consistent with the carrier’s performance in the last several months, and can be attributed to its aggressive network expansion, higher subsidy offerings and improved user handset options including the iPhone. The introduction of Apple‘s iPhone on China Mobile’s SCDMA 3G and TD-LTE 4G networks in January this year has been a primary growth driver for the carrier’s 4G user adds in recent months. This is evident from the fact that nearly half of China Mobile’s 2.8 million 4G subscribers by the end of March were iPhone users. The company has also benefited from the fact that the Chinese government has only awarded TD-LTE 4G licenses to carriers, while FDD-LTE 4G licenses are still pending. This is preventing rival carriers China Unicom and China Telecom from rapidly expanding their 4G networks in the country, since their existing wireless networks (WCDMA 3G) are more compatible with FDD-LTE, unlike China Mobile’s TD-SCDMA 3G network.

See our complete analysis of China Mobile here

Rising Subsidies Weighing On Profit Margins

In its recent first quarter 2014 earnings release, the company reported a 9.4% drop in profits even as its overall revenues increased by about 8%. This decline in net profit was attributed to increasing competition in the Chinese wireless market and growing popularity of over-the-top applications such as WeChat. In the wake of rising competition, China Mobile had to offer higher handset subsidies on popular smartphones to gain subscribers. Although higher subsidies immensely helped the carrier expand its subscriber base and 3G/4G mix, it also significantly increased its operating expenses, which led to a decline in the bottom line. This trend was visible in 2013 as well, when the carrier spent $4.4 billion in subsidy costs and added almost 104 million 3G subscribers, improving its 3G mix from 12.4% in 2012 to 25% at the end of 2013.

Going forward, we expect China Mobile to continue gaining 3G/4G subscribers, which should help improve its market share as well as 3G mix. However, profitability is likely to remain a concern for the carrier as it expects mobile subsidy expenses to rise as much as 30% this year compared to 2013 levels.

4G Network Expansion To Cost $12 Billion in 2014

China Mobile mentioned in its full year 2013 earnings release that it expects to incur capital expenditures (CapEx) of approximately RMB 225.2 billion ($36.3 billion) in 2014, about 22% more than its 2013 figure. The carrier also mentioned that 44% of its capital expenses are likely to be used in building wireless networks, of which about 75% will be spent on building about 500,000 base stations to expand its TD-LTE 4G network. According to those estimates, the expenditures likely to be incurred in expanding the carrier’s 4G network, come out to be about $12 billion. Going forward, we estimate that the company’s overall CapEx is likely to decline to about 28% of sales by the end of our forecast period, from an estimated 32% in 2014. If the expenditures do not decline as expected and remain close to 30% of sales, there could be a downside of over 10% to our price estimate.

(Credit: Web)