China Mobile (NYSE:CHL), announced its 3rd quarter data recently, stating that revenues have grown from $52 billion for the first 9 months of 2010 to $59 billion during the same period in 2011. The group achieved favorable growth leveraging upon their advantage of scale of operation, brand name and superior customer service. China Mobile is the largest telecom service provider in the world based out of China competing against China Unicom (NYSE:CHU) and China Telecom (NYSE: CHA).
It offers mobile voice and value added services like mobile internet, SMS, mobile music to name a few, to its customers. The value added business of the company has been seeing rapid growth as more and more people take to wireless data access and also with smartphones increasing in popularity in China.
We maintain our price estimate of $58.50 for China Mobile, implying significant upside from the market price.
Subscriber base expanding
Net additional customers increased by 49.5 million in the first 3 quarters, up by 4% from the same period in the previous year. The 3rd quarter itself saw net additions of 17 million. In our recent article, China Mobile’s 43.6 Million Net Adds Shows Giant is Still Growing, we analyzed net additions through August 2011 for the company, and as expected, the subscriber base of the company is still expanding. The increase in subscriber base has been greater than the increase in revenues taking down the average revenue per user with it historically and this trend is expected to continue in the future. This is primarily because the new users being added are more from the rural areas who do not have the capacity for high usage.
Declining margins
The company reported EBITDA of $13 billion, 5.4% above the same period in the previous year. However, as we had expected, EBITDA margins continued to decline and it fell from 50.4% for the first 9 months of 2010 to 48.8% for the same period in 2011, mainly because of slowing of macroeconomic growth of China, increasing penetration rate of low end mobile phones, intense competition in the Chinese telecom industry and also technological disadvantages faced by the company. Inability to raise tariffs beyond a level due to regulations by the Chinese government squeezed the margins more. Competition from both China Unicom and China Telecom is prompting them to offer certain discounts and promotional offers to remain competitive in terms of price and performance. EBITDA margins of the company are thus taking a hit.
It is interesting to know that the company enjoyes much higher EBITDA margins as compared to its competitors. Both China Unicom and China Telecom offer large subsidies on the mobile phones they sell to attract customers and try to bundle it with their services. These subsidies have taken taken down the margins of these companies substantially. China Mobile, on the other hand, is though facing declining margins, does not offer subsidized handsets and is therefore, enjoying higher margins.