China Mobile

Interim earnings expected to be robust on strong domestic fundamentals despite global economic downturn

PUBLISHED : Monday, 13 August, 2001, 12:00am
UPDATED : Monday, 13 August, 2001, 12:00am

China's dominant mobile phone operator is expected to post a 73 per cent surge in profits for the first half of this year.

Spurred by a resilient mainland economy and despite a global economic downturn, China Mobile (Hong Kong) is anticipated to achieve robust earnings growth in the first six months of the year.

A forecast of five global brokerages surveyed by Business Post puts interim net profit as high as 15.1 billion yuan (about HK$14.14 billion), an increase of 73 per cent.

China Mobile, which controls almost three-quarters of the mainland cellular phone market, is forecast to post net earnings of between 14.3 billion to 16.1 billion yuan for the six months to June 30.

This would imply an explosive year-on-year growth rate of between 72 per cent and 85 per cent.

In the previous corresponding period, China Mobile recorded 8.72 billion yuan in net profit.

China Mobile is scheduled to report its interim results on Thursday. The expected profit surge was aided by strong subscriber growth, which leapt 169 per cent from a year earlier to 58.17 million, according to analysts.

Analysts were also expecting China Mobile to benefit from the rapid decline in network and equipment prices in China over the period.

'Equipment manufacturers have been slashing prices to gain a foothold in the burgeoning Chinese market,' said Morgan Stanley in its preview research report for China Mobile.

'We anticipate a further 5 per cent to 10 per cent drop in pricing beyond the 15 per cent decline already in our numbers for China Mobile.'

China Mobile, which budgeted US$5.5 billion for capital expenditure, would be able to save US$1.6 billion this year due to the fall in telecommunications equipment prices, according to HSBC Securities.

Last year, China Mobile saved US$1.3 billion in capital expenditure due to the price drop in telecoms equipment, which came as a positive surprise to analysts.

Morgan Stanley said the anticipated further drop in equipment pricing would raise China Mobile's earnings per share by 1 per cent to 2 per cent.

However, the strong profit growth in the first half, due to both organic growth and acquisitions, is generally not expected to be sustained in the remainder of the year, as the decline in ARPU (average revenue per user) is anticipated to accelerate only moderately in the second half.

Analysts said ARPU was the key number to watch at China Mobile's interim results. They were concerned that a fall in ARPU may accelerate as 95 per cent of its net additions for the past six months were low-usage pre-paid clients.

China Mobile's attempt to boost mobile usage through the introduction of controversial bucket plans in March seems to have had a limited impact on the decline ARPU, according to analysts.

Analysts are forecasting China Mobile's ARPU to fall 20 per cent to 25 per cent in the first half, and would accelerate to 25 per cent to 30 per cent in the second half.

This would lead to a drop in China Mobile's earnings before interest, tax, depreciation and amortisation margin by about 2 per cent to 57 per cent, according to the poll.

China Mobile plans to introduce the high-end general packet radio service and hopes value-added data communication services will help improve its ARPU.

However, BNP Paribas Peregrine said the mainland's mobile phone users were highly price sensitive, and might not be willing to pay substantially more for mobile data services.

With the expected fall in ARPU, China Mobile would have to either increase its subscriber numbers or control its costs in order to improve profitability.