Looking for the 4G harvest

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China’s and the world’s largest mobile carrier China Mobile (NYSE: CHL, initial buy at $53.22), has aggressively sought to grab 4G subscribers over the past 18 months and been very successful in its efforts. Judging from some numbers the company released late last week for its nine months year to date, it is beginning to reap some of the financial rewards.

Based on the figures released by the company, revenues in the third quarter grew 10% year on year to RMB172 billion, while operating profit and net profit increased by circa 13% year on year. Net profit came in at RMB28.2 billion and the 13% growth rate was the fastest recorded by the company in the last five years.

For the nine months year to date, revenue of RMB512.7 billion is running 6.5% higher than in the comparable period of 2015. Earnings before interest, tax, depreciation and amortisation (EBITDA) of RMB192.3 billion represented an increase of 9.1% on the back of a 90 basis point expansion in the EBITDA margin.

Net profit growth is still lagging on a nine month basis, with RMB85.4 billion a more modest 3.4% increase year on year as the net profit margin compressed 50 basis points to 16.7%. Operating momentum appears to be improving though and net profit growth should continue to pick up late this year and in 2016, as 4G customers are monetised.

China Mobile’s information for its quarterly updates is relatively scarce, but derived from the figures provided it seems average revenue per user (ARPU) was under pressure in the third quarter, which was the main dampener amongst the results.

This was likely due to several factors: Firstly, the company discounting its 4G data services to grab customers at an early stage of the race, second, expected declines in voice and SMS/MMS revenues and finally, government pressure to reduce data pricing to encourage mass adoption of high speed services. China Mobile may have elected to absorb much of this earlier rather than later. We will be able to get more of a feel for this after the company releases its full year results in a few months’ time.

Meanwhile, China Mobile’s 4G subscriber grab is on track, with the recently released September operational numbers showing the company added approximately 18.3 million 4G customers.

This has taken its total 4G subscriber base to over 229 million, substantially exceeding its 3G subscriber base and a long way from the approximately 41 million 4G subscribers China Mobile had a year ago! China Mobile has now strung together four consecutive months of 18 million plus 4G subscriber additions and is going to overshoot its earlier stated goal of having 250 million 4G customers by the end of the year.

We view China Mobile as very modestly priced, with the shares trading on a forward EV/EBITDA of around 4.4 times.

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