We have raised our capital expenditure assumptions for China Mobile CHL  for the coming years following high-profile comments from the carrier's CEO about its 4G commercialization plans. In addition, we expect the carrier to ramp up investments in the existing 3G network and in Wi-Fi hotspots in major markets to improve user experience for data services in the face of intensifying competition from rivals China Unicom CHU and China Telecom CHA . Our updates have led to an increase of 8.7% on average (compared with the old model) in annual capital expenditure between 2012 and 2015. Annual capital expenditure over the next four years will average CNY 130 billion ($20.6 billion) and we think China Mobile is poised to reap benefits from these investments over the longer term. For 2012 and 2013, we modeled revenue to grow by 5.1% and 5.2% respectively, and EBITDA to grow by 3% and 4%. We are sticking to our fair value estimate of $56 per ADR, which implies an enterprise value to EBITDA of 4.6 times and 12.3 times 2012 earning. The stock has outperformed peers China Unicom and China Telecom so far in 2012, posting an 8.5% gain, compared with a 3.9% gain of China Telecom and a 12.5% loss of China Unicom, partly due to renewed investor interest given the carrier's 4G outlook. We think the stock remains slightly undervalued, trading at 8% to our fair value estimate. With a 4% dividend yield (backed by a huge cash hoard of $52 billion and strong free cash flows), the stock should still look attractive to income investors, although we think further upside in the stock price from the current level will be limited, and suggest investors looking to build a position to wait for a pullback in the stock price.

At the recently held Mobile World Congress in Barcelona, Spain, China Mobile disclosed an ambitious plan to speed up the build-out of 4G TD-LTE network over the next few years, increasing the number of operational base stations to 20,000 by 2012 and to 200,000 by 2013. According to the plan, 4G services will be on commercial trials in nine cities, including Hangzhou and Shenzhen where full 4G coverage in the urban areas will be ready within a year. While China Mobile's parent company shouldered the bulk of investments in the 3G infrastructure in the past years, we expect the carrier to also step up investments in the 3G TD network and in Wi-Fi hotspots to offload data traffic from its 2G and 2.5G network, so the network can continue to deliver the top-quality voice service and reliable connection that high-end users have associated China Mobile with. In our view, the investments in 3G and Wi-Fi are also necessary for China Mobile to preserve its base among high-end users before the official issuance of 4G licenses, which won't happen before 2014, in our view.

China Mobile reported 655 million mobile subscribers by the end of January, or 66.4% of the overall market in China. 3G users totaled 54 million, still ahead of China Unicom (43.1 million) and China Telecom (38.7 million). Barring a breakthrough in negotiation with Apple on a 3G TD-iPhone in the near future (which we don't think is particularly likely), we expect China Mobile will drive the bulk of 3G user increase by adding more midrange and lower-end smartphones, including those that are priced at around CNY 1,000 ($160). We view this as a sensible strategy, as China Mobile should still generate decent data service revenue per user without having to offer high handset subsidies.
 

Source:cn-c114