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Morningstar | China Mobile Dominating the Telecom Market but Battling Government-Mandated Price Cuts.

With more than 916 million customers, China Mobile not only dwarfs its Chinese competitors, but also is the world's largest wireless telephone company by far. It has more 3G/4G subscribers than its competitors despite being handicapped by the Chinese government, which required it to use the home-grown TD-SCDMA technology standard for 3G mobile. However, with the industry shift to 4G, the technology playing field is more level, as the strong handset ecosystem development in the first few years of operation of China Mobile's TD LTE network means that the technology gap between its 4G version and its competitors is much smaller than it was for 3G. In addition, China Mobile has had about a 12-month head start on its 4G network rollout, with 1.9 million 4G base stations by year-end 2017. This gives it a strong head start against its competitors, which only gained national FDD LTE licences in February 2015. Owing to its early success, China Mobile has generated significant free cash flow. It has not only the strongest balance sheet among telecom companies worldwide, but also one of the strongest, period. At the end of December 2017, the firm had a net cash (including marketable securities) position of USD 74 billion. This cash provides the ability to build out its network faster than its competitors. It also provides opportunities to develop or buy products and services to use on its network to compete against over the top, or OTT, players. Indeed, management considers one of its major assets to be its 916 million customers and the information that it has about them. Management is actively investigating how it can best leverage this for its own digital services products to compete against the large Chinese OTT players. The government's tariff-reduction measures have negatively affected profit growth in 2017 and 2018, and following this, the company will be in the investment phase of 5G network and service rollout. We expect returns to increase again once this investment phase finishes in 2022.