China Mobile (00941.HK), the nation’s largest mobile operator, reported its first drop in full-year earnings in 14 years as government decisions and market competition took their toll, dimming near-term prospects for the telecom giant.
The state-owned mobile operator, which has more than 700 million subscribers, is being forced to pour billions of yuan into the homegrown TD-LTE network while also being told to keep service fees down to grow usage.
This squeeze was reflected in the company’s earnings last year. Profits were down 6 percent from the previous year, while revenue was up 8.3 percent. China Mobile needs to have a large cash hoard to fund its massive 4G network roll out, prompting it to cut its final dividend by 9 percent from the previous year, despite keeping its full-year dividend payout ratio at 43 percent.
Dividends have long been China Mobile’s key attraction but this year institutional investors did not nudge the company to increase payouts. China Mobile shares hit a 12-month low after the results announcement. Meanwhile, China Telecom (0728.HK) raised its final dividend by 11.8 percent and China Unicom (0762.HK) increased its by about a third.
China Mobile appears to have few options to maintain growth, given existing government policy. The company has to bear the brunt of the capital expenditure and asset depreciation of the 4G network rollout. It’s a 180-degree turn from its experience in the 3G development process. Back then, the network was owned by its parent and the company only had to pay capped annual fees to use it. There were no investment or depreciation charges.
The scale of the 4G burden can be seen in the outlay projected for this year. China Mobile’s 2014 capital expenditure will be around 225 billion yuan (US$36.56 billion), up 21.8 percent from 2013, of which about 75 billion yuan will be for 4G network deployment. It’s all part of the company’s plan to have 500,000 4G base stations covering all the major cities and towns by the end of this year.
But even that number of base stations will not be enough for China Mobile’s 4G ambitions, and the company has warned that its capex will continue to rise in the next two years. That puts China Mobile in the peak of its capital investment cycle.
The huge spending needed to build the 4G network is not China Mobile’s only burden. The company has also set aside 34 billion yuan for handset subsidies to lure existing users over to the new system. Last year the subsidies were 26.3 billion yuan. The money will most likely be used to pay for popular smartphones such as Apple Inc.’s iPhone and Samsung Electronics’ Galaxy series that will be given away in exchange for customers signing up for two-year contracts.
Mainland phone users have enjoyed cheap services in the past few years as the government has flexed its policy muscle to push down service fees. And prices are only likely to fall further. China Mobile says its 4G users are paying about 180 yuan each month on average, but China Unicom is heating up competition with monthly fees starting at just 76 yuan. China Mobile may have to lower its 4G fees to keep up with its competitors.
China Unicom and China Telecom have the advantage of being buffered by their fast-growing fixed-line broadband services, while China Mobile’s fixed line network is still in the early stage of development and used mainly for its own transmission.
This all adds up to a lot of financial suffering for China Mobile now and in the next few years as the tough times run on.
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