China Mobile (CHL), the largest telecommunication operator in China, enjoys the advantages of monopoly power, higher network coverage than its competitor China Unicom, strong customer loyalty and new customer acquisition abilities. In the near future, China telecommunication industry is expected to reform. The most likely restructuring plan would be that China Mobile (CHL) merges with the national railway's fixed-line unit, China Tietong. China Unicom's (CHU) GSM mobile business joins with China Netcom Group while China Telecom Corp (CHA), the country's top fixed-line operator, acquires Unicom's CDMA mobile telephone business. As a result, the four market players who specialize either in mobile business or fixed-line business will be merged into three all-service providers. Then, China Mobile will be faced with two stronger competitors instead of China Unicom only which is far from being a threat to China Mobile’s positioning. However, we expect China Mobile will maintain its dominant positioning in the market in at least one or two years after the restructuring. Thus, we recommend a buy rating for China Mobile.
1. Aggressive Investments in Network Upgrade and Expansion
In the past few years, investments made by the four telecommunication operators totaled 200 billion RMB per year, half of which were contributed by China Mobile. From the end of year 2006, China Mobile launched the plan of upgrading EDGE network in the main cities and municipalities. In 2007, GSM/EDGE network investment increased by 15% from year 2006. In 2008 and 2009, network investment will reach 98 billion RMB and 96 billion RMB respectively, which will be mainly used in GSM network construction and research and development in new technology. Due to the better established network, mobile users in China have a widely perception that China Mobile’s signal quality is superior to its competitor China Unicom’s, especially in smaller cities.
2. Superior New Customer Acquisition Ability
In October 2007, China Mobile’s new users grew 6.6 million, reaching the highest record for year 2007, which were 8.2% higher than previous month and 43.8% higher than the corresponding period in 2006. The main reason for the significantly higher grow rate of China Mobile than China Unicom is because of China Mobile’s wider coverage and superior network.
In comparison, in October 2007, China Unicom’s new users grew 1.49 million, slightly lower than September by 30 thousand new users. GSM new users rose 1.13 million, increasing 22.5% from October 2006, but falling 2.9% from September 2007. CDMA new users grew 0.36 million, representing 1.1% increase from September 2007, but a decrease of 0.8% from October 2006.
In October 2007, China Telecom lost 880 thousand fixed-line users to 223 million and China Netcom lost 370 thousand fixed-line users, hitting a record high of customer outflows. However, broadband users had grown steadily, with 550 thousand new users for China Telecom and 460 thousand new users for China Netcom. In total, China Telecom had 34.44 million broadband users and China Netcom had 18.82 million broadband users by the end of October 2007.
3. Unshakable Positioning After Industry Restructuring
After restructuring, China Unicom is expected to have a stronger positioning. By splitting GSM and CDMA business, China Unicom can solve the problem of internal competition between the two businesses. Restructuring can also reduce of China Telecom and China Netcom on the falling fixed-line business by adding the fast growing mobile business after granted with 3G license. The growth in size and number of all-service telecommunication operators can weaken China Mobile’s current monopoly power; however, China Mobile is likely to sustain its dominant positioning.
Still Be the Largest Player
After the restructuring, China Mobile will remain as the number one player with unbeatable advantages until GSM and CDMA separated from China Unicom are developed to cover wider ranges and provide better signal in smaller cities.
Besides, adding a fixed-line business to a mobile business operator is not as complicated as adding a mobile business to a fixed-line business operator, since mobile business will be the mainstream of the market and it will take time for fixed-line operators to accumulate skills, expertise, knowledge and technology of running a new type of business.
High growth in Mobile business with low penetration into market
China’s mobile business is expanding at a fast pace. In the first 11 months of 2007, mobile users increased by 27.1% to 78.29 million from the same period in 2006. In November 2007, new mobile users rose 32% to 7.93 million from November 2006.
The double-digit growth is still far away from satisfying the market demand for mobile usage. By September 2007, the mobile users had represented 39.9% in the mainland China and 15% of 745 million residents in the rural area. In comparison, by the end of year 2006, the national mobile phone users’ in Korea, Hong Kong, Japan, Singapore and Malaysia had taken up respectively 83.23%, 137.73%, 71.86%, 94.07% and 73.06%. This large market capacity is expected to dilute the intensity of competition in the next two to three years.
4. Risk Alert
Since currently the world markets are severely affected by US sub-prime crisis, Hang Seng index fell 15.83% for the past two days, and rose 10.72% on 23 Jan 2008. The systematic risk of investing in China Mobile is very high in the current situation, since the market is still pessimistic about US economy.
In addition, although China Mobile’s positioning is not believed to be threatened after the restructuring, the market price of China Mobile is likely to fall once the restructuring plan is formally announced since market will perceive it as adverse news to China Mobile. We believe the safer investment time is before the end of the Olympic Games, as the launch of restructuring is likely to happen after the Olympic Games, since the government will ensure no disturbance in communication can occur during the period of Olympic Games which are taken as an opportunity to introduce China to the whole world.