China Mobile Slides as Earnings Fall - Analyst Blog

China Mobile Limited CHL, the world's largest mobile operator by subscriber base, announced the results for full-year 2013 with adjusted net income of RMB 121.69 billion ($19.65 billion) that fell 5.9% year over year owing to higher infrastructure cost and stiff competition. The reduction in earnings affected the stock price as it declined 6.23% after market close on NYSE on Thursday.

Revenues & EBITDA

In 2013, total revenue climbed 8.3% year over year to RMB 630.17 billion ($101.77 billion). Telecommunication service revenues, comprising roughly 93.75% of total revenue, were RMB 590.81 billion ($95.41 billion), up 5.4% year over year. Steady revenue growth was attributable to rapid growth of wireless data revenue, which was up by a massive 58.6%.

EBITDA came in at RMB 240.43 billion ($38.83 billion), down 5.2% from the prior year. EBITDA margin was 38.2%, down 540 basis points from 2012.

In Dec 2013, the company inked a long term co-operation agreement with Apple Inc. AAPL to sell iPhone models through its TD-LTE and TD-SCDMA network.

Subscribers

China Unicom added 56,910 million new subscribers to reach 767.21 million at the end of 2013. Subscribers grew 8% in 2013 from the previous year. However, the company's market share declined to 62.1% from 63.9% in 2012.

China Unicom's 3G business is growing at a fast pace since its introduction and has become one of the major drivers of revenue growth. The company's total 3G subscriber base reached over 190 million, with 104 million new customers added in 2013. Over 150 million TD-SCDMA handsets were sold, of which 95% were smartphones.

China Mobile received TD-LTE (Time Division Long Term Evolution) license in Dec 2013 and since then commercialized TD-LTE in 16 different cities in 2013. The company desires to become the world's largest 4G network with 500,000 base stations that will cover rural and urban China by 2014. At the end of Feb 2014, total LTE customers reached 1.34 million.

Expenses

Total expenses crept up 15.24% year over year to RMB 494.53 billion ($79.87 billion) in 2013, due to higher selling expenses, subsidy, leased expenses and other operating expenses. Selling and marketing expenses increased 14.5% year over year to RMB 91.83 billion ($14.83 billion), mostly due to higher promotional spending on handsets and applications.

Liquidity

China Unicom exited 2013 with cash and cash equivalents of RMB 44.93 billion ($7.26 billion) compared with RMB 70.91 billion ($11.45 billion) at the end of 2012. Net debt at the end of 2013 was RMB 4.99 billion ($805.8 million) as compared to RMB 28.619 billion ($4.62 billion) at the end of 2012.

Operating cash flow declined 2.5% year over year to RMB 224.98 billion ($36.33 billion) in the reported year. Free cash flow was much worse at RMB 40.1 billion ($6.47 billion), down almost 61.2%.

Dividend

The company proposed a final dividend of HK$1.615 (21 cents) per share and has paid an interim dividend of HK$ 1.696 (22 cents) per share totaling 2013 yearly dividend of HK$ 3.311 (43 cents) per share.

Outlook

China Mobile wants to push for VoLTE (voice over LTE) live network testing to realize the commercialization of VoLTE service by the end of 2014, thus grabbing the first mover advantage in China.

The company's planned dividend pay-out ratio for 2014 is 43%.

Peer Performance

China Unicom Hong Kong Limited CHU, China's second largest mobile operator, reported adjusted net income of RMB 10.4 billion ($1.68 billion) that surged 46.7% year over year. Total revenue (excluding deferred fixed-line upfront connection fee) for the company climbed 18.5% year over year to RMB 295.0 billion ($47.65 billion) in 2013.

Our Analysis

China Mobile will continue to leverage from its leading position in the Chinese wireless market along with a healthy cash flow generating ability, which is expected to generate solid returns in 2014. Further, strong customer adaptation of its recently launched LTE service and its expansion will be accretive to the company's subscriber growth.

However, we remain concerned about the drop in yearly profit and rise in operating costs due to roll out of infrastructure. Higher costs to achieve its LTE rollout target can impact its profitability.

China Mobile currently carries a Zacks Rank #4 (Sell). A better-ranked stock in this sector includes SK Telecom Co Limited SKM, which carries a Zacks Rank #1 (Strong Buy).