16 February 2019
Almost 80 percent of new users of high-speed mobile networks in the past two years have chosen China Mobile. Photo: Bloomberg
Almost 80 percent of new users of high-speed mobile networks in the past two years have chosen China Mobile. Photo: Bloomberg

Bright future for China telecom sector

The Hong Kong and China stock markets have been falling recently. Is the real economy that bad?

Mainland telecom operators, at least, paint a much brighter future.

By the end of November last year, there were nearly 800 million 3G/4G mobile network users in the mainland, up almost 300 million from a year earlier.

That shows internet demand remains robust despite slower economic growth.

If we subtract the 3G users of China Mobile Communications Corp. (00941.HK), the total number of 3G/4G users was nearly 600 million, an increase of 250 million from the previous year.

Who is the biggest winner in the 3G/4G era?

Almost 80 percent of new users in the past two years have chosen China Mobile.

The competition among different telecom companies has been intensifying. China Mobile seems to have taken the lead.

That said, why has the share price of China Mobile failed to outperform those of its rivals?

The recent devaluation in the renminbi would certainly undermine the Hong Kong dollar-denominated earnings and investment value of Chinese companies.

More importantly, in the telecom industry, massive upfront investment, subsidies for new users and huge depreciation expenses all weigh on the bottom line despite increasing revenue.

However, telecom operators are expected to enjoy rising profits one or two years later, after the subsidies for new users and depreciation expenses level off.

China Mobile is therefore likely to experience rapid profit growth, unless the renminbi weakens a further 5 to 10 percent in the next three years.

Will the authorities slash internet charges during the economic downturn? It’s unlikely.

China has been trying to develop its own 4G network based on TD-LTE technology for almost a decade.

China Mobile is an active player in promoting the technology. The government will give its more leeway in earnings.

How long can the smartphone boom in China be sustained?

Mobile-phone sales expanded by less than 10 percent last year, despite an increase of 300 million new users.

The penetration rate will reach nearly 70 percent by the end of this year, when the mainland’s 3G/4G users exceed 900 million.

How to sustain such rapid growth in the future?

The telecom market’s focus will then shift to content providers and telecom operators and away from smartphone suppliers.

At that point, it depends on which platform can gather the most traffic.

Simply speaking, winner takes all.

This article appeared in the Hong Kong Economic Journal on Jan. 20.

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal

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