China Mobile Limited (CHL), the world’s largest mobile operator by subscriber base, announced results for the first six months of 2014 with adjusted net income of RMB57.7 billion ($9.4 billion) that fell 8.5% year over year owing to higher infrastructure cost and stiff competition.
Revenues & EBITDA
In the first six months, total revenue climbed 7.1% year over year to RMB324.7 billion ($52.9 billion). Telecommunication service revenues, comprising roughly 94% of total revenue, reached RMB297.9 billion ($48.5 billion), up 4.7% year over year. Steady revenue growth was attributable to rapid growth of wireless data revenue, which was up by a massive 51.8%.
EBITDA came in at RMB118.3 billion ($19.3 billion), down 4.4% from the prior year. EBITDA margin was 36.4%, down 330 basis points from the year-ago period.
Subscribers
China Mobile added 60.84 million new subscribers to reach 790.61 million as of Jun 30, 2014. Subscribers grew 21.8% from the year-ago period. However, the company’s market share declined to 62.4% from 62.8% as of Jun 30, 2013.
China Mobile’s3G business has been growing at a fast pace since its introduction and has emerged as one of the major drivers of revenue growth. The company’s total 3G subscriber base reached over 238.5 million, with 46.9 million new customers added in the first half of 2014. At the end of Jun 2014, total LTE customers reached 13.9 million.
In addition, over 120 million TD-SCDMA handsets were sold, of which 22 million were 4G handsets.
Expenses
Total expenses crept up 13.2% year over year to RMB262.3 billion ($42.7 billion) in the first six months, due to higher selling expenses, subsidy, leased expenses and other operating expenses. Selling and marketing expenses increased 10% year over year to RMB44.7 billion ($7.3 billion), mostly due to higher promotional spending on handsets and applications.
Liquidity
China Mobile exited first-half 2014 with cash and cash equivalents of RMB73.9 billion ($12 billion) compared to RMB44.93 billion ($7.26 billion) at the end of 2013. Total debt at the end of the first six months was RMB6.4 billion ($1 billion), unchanged from 2013 annual figures.
Operating cash flow declined 4.1% year over year to RMB120.1 billion ($19.6 billion) in the reported period. Free cash flow was at RMB36.3 billion ($5.9 billion), down almost 47%.
Dividend
The company paid a total dividend of RMB26 billion ($4.2 billion) during the period ended Jun 30, 2014, which compares to total dividend of RMB28.5 billion ($4.6 billion) paid in the year-ago period.
Outlook
China Mobile wants to accelerate VoLTE (voice over LTE) live network testing to realize the commercialization of VoLTE service by the end of 2014, thus grabbing the first mover advantage in China.
The company desires to become the world’s largest 4G network with 500,000 base stations that will cover rural and urban China by 2014. In addition, the company expects to distribute 100 million handsets and cover 50 million customers by the end of 2014.
The company’s planned dividend pay-out ratio for 2014 is 43%.
Peer Performance
China Unicom Hong Kong Limited (CHU), China's second largest mobile operator, announced financial results for the first half of 2014 with net income of RMB6.7 billion ($1.1 billion) that surged 26.4% year over year on strong revenue growth and higher adoption of 3G plan. Earnings per share increased 22.7% year over year to RMB0.27 (4 cents per share).
Our Analysis
China Mobile will continue to leverage from its leading position in the Chinese wireless market along with a healthy cash flow generating ability, which is expected to generate solid returns in 2014. Further, strong customer adaptation for its recently launched LTE service and expansion of the same will be accretive to the company’s subscriber growth.
However, we remain concerned about the drop in yearly profit and rise in operating costs due to roll out of infrastructure. Higher costs to achieve its LTE rollout target can impact its profitability.
China Mobile currently carries a Zacks Rank #3 (Hold).
Noteworthy stocks in this sector include Cellcom Israel Ltd. (CEL) and NTT DOCOMO, Inc. (DCM), with a Zacks Rank #1 (Strong Buy) and a Zacks Rank #2 (Buy), respectively.
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