EUR 850.00 For Business Accounts Only

Morningstar | Regulated Price Reductions Negatively Affect China Mobile’s 3Q; FVE Reduced to HKD 97

China Mobile’s third-quarter summary results were slightly below our expectations, with service revenue down 3.0%, EBITDA down 3.4%, and net profit basically flat. As we saw with China Unicom’s result, the removal of mobile data roaming tariffs appears to have had a big impact. We retain our narrow moat rating but lower our fair value estimate to HKD 97 (USD 62) from HKD 100 (USD 64) previously, owing to slight downgrades to our forecasts. This fair value estimate implies a forward P/E of 16 times and a dividend yield of 3%, making China Mobile shares attractive at current levels, in our view. We expect the company to maintain its earnings growth at mid-single-digit rates per year in the medium term. We also retain our Poor stewardship rating on China Mobile, based primarily on the company’s poor capital management track record.

Nationwide mobile data tariffs were introduced from July 1, 2018, with the company admitting this was likely to be an unquantified negative for revenue in the short term. However, this development also represents an opportunity to further reduce complexity and costs in marketing and customer service in the medium term. Handset data traffic continued to accelerate, as we have seen in most telecom markets across the region: 121% data traffic growth in 2017 became 152% in first-half 2018 and 199% in second-quarter 2018. While this growth is not translating to overall average revenue per user, or ARPU, growth, given data price reductions, falling voice revenue, and the increase in multi-SIM users, we see it as a very positive sign for the long-term future of the telcos, as people (and devices) are becoming more and more dependent on telecom networks to provide the data connections required to function efficiently.

The move to IFRS/HKFRS 15 has affected reported services revenue growth. The reported services revenue growth for the first three quarters of this year was 0.3%, but using like-for-like accounting standards, this would have been 3.5%. No estimates were provided for like-for-like EBITDA or profit growth. The seemingly random industry price reductions stipulated by the regulator are having a negative impact on operators’ profits and making it harder for the smaller operators in particular to return to earning positive real economic returns. Due to its greater scale, China Mobile’s returns on invested capital remain twice its 10% weighted average cost of capital, while its two competitors’ returns are below their costs of capital. With China Mobile foreshadowing a targeted 5G commercial launch in 2020, we would expect its returns to remain constrained until the heavy 5G investment period ends in 2022. Beyond that, we expect returns to improve again, as underlying demand for mobile data services remains very strong and China remains committed to a high-tech future that will rely on telecom services.