U.S. News

China Mobile Quarter Profits Beats Forecast, Margins Under Threat


China Mobile, the world's largest wireless carrier, beat forecasts with a near 20% rise in quarterly net profit on the back of strong subscriber growth, but analysts warn that margins may shrink as competition intensifies.

The rise also marked a sharp slowdown from the state-run giant's 30% net profit growth of a year earlier, partly because the company -- like its sole domestic foe China Unicom -- is now driving into lower-paying rural markets to sustain growth.

Mobile subscriber uptake in China, the world's largest telecommunications market, is slowing as big-city markets get saturated. China Mobile and Unicom are slugging it out to sign up less-affluent customers in smaller cities and the hinterlands.

"The company is still growing pretty fast but it's coming under increasing competitive pressure," Andrew Hall, an analyst at Research-Works, said. "Both China Mobile and Unicom are putting a lot more money in marketing, and as a result, we could see some pressure on margins over the year."

To drive expansion, a listing on China's domestic A-share markets -- an increasingly hot capital-raising option for Hong Kong-listed firms -- would be a practical move, executives told reporters on Wednesday without elaborating.

"We have raised a proposal to regulators: to list domestically by selling part of the existing shares owned by our parent company," Chairman and Chief Executive Wang Jianzhou told reporters. "But it needs the approval of the regulators."

China Mobile -- which controls two-thirds of the country's mobile market -- posted a net profit of 19.9 billion yuan ($2.6 billion) for the three months ended Dec. 31, according to Reuters calculations, versus 16.6 billion yuan a year earlier.

The result soundly beat an average forecast of 18.8 billion yuan in a poll of 23 analysts by Reuters Estimates.

Waiting On 3G

But the main factor influencing China Mobile's performance in the longer term would be if and when China's homegrown third-generation technology takes off.

Investors hope the arrival of 3G -- apart from offering a spending boon up for the likes of Nokia and Motorola -- would reinvigorate China Mobile's and Unicom's service offerings and grant them fresh revenue streams.

Beijing recently extended pre-commercial testing of its homegrown TD-SCDMA standard -- which will offer faster Internet access and better video streaming, and may open up new sources of revenue for operators -- to 10 cities from the original five.

China Mobile's parent, which is responsible for the pre-commercial testing in eight cities, is discussing technical details with equipment makers and will start purchasing from vendors this month or next, Vice President Li Yue told reporters.

He did not identify any firms or the value of potential contracts, but firms said to be interested included China's own ZTE Corp., Ericsson, Nokia, Nortel and Siemens. The trial may last as late as the end of October.

Shares in China Mobile, which rose 22% in the fourth quarter, compared with Unicom's 48% gain and a 14% rally by the benchmark Hang Seng Index, closed up 1.17% on Wednesday. The stock trades at 18.5 times estimated 2007 earnings, compared with Vodafone's 12.7 and NTT DoCoMo's 18.9, according to Reuters Estimates.

Until 3G, China Mobile will rely on organic growth of a still under-penetrated Chinese wireless arena that is adding more than five million users monthly.

China boasted 467 million mobile subscribers and 369 million fixed-line users at the end of January, official data showed.

China Mobile added 4.9 million subscribers in February, bringing its total users to nearly 311 million -- about the population of the U.S. -- at the end of February.