Revenue worries prompt China Mobile rethink
Most analysts have downgraded their earnings forecasts for China Mobile (HK) on the back of its disappointing interim results but are sticking with buy recommendations for the stock, now at a 21-month low of HK$29.15.
Of 19 brokerages surveyed by the South China Morning Post, 12 have buy, long-term buy or outperform ratings on the mainland telecommunications giant, There were six holds and a solitary underperform, from BNP Paribas.
The bulls include the big American houses such as Goldman Sachs, Merrill Lynch, Morgan Stanley and Lehman Brothers. Other upbeat houses include CLSA Global Emerging Markets, HSBC Securities and ING Barings.
Target prices set by brokerages with a positive view range from $35 to $56.16, with most at $40.
Investors should not necessarily take the predominance of buy recommendations as a signal to move. Most of the buys have been around for a long time. Perhaps more telling is the cutting of target prices and earnings forecasts.
This can be a form of code language, with analysts who are under pressure to be positive telling fund managers to sell.
Only CLSA and Prudential-Bache upgraded China Mobile's target price. BNP, UBS Warburg and Kim Eng Securities were most bearish and cut target prices to between $19 and $30.40.
The steep fall in China Mobile's average revenue per user and the growth slowdown in minute usage and subscriber numbers have sparked fears the firm's once copper-bottomed growth story is fading fast.
Last Thursday, China Mobile produced a 58.3 per cent year-on-year rise in interim net profit to 13.8 billion yuan (about HK$12.93 billion), against consensus expectations of a 73 per cent growth.
It also surprised the market with a faster than expected 39.5 per cent year-on-year fall in average revenue per user to 158 yuan.
However, its subscribers only grew 31 per cent to 58.9 million during the period.
The bulls did have something to cheer. They pointed to the positive surprise that margins before interest tax, depreciation and amortisation grew to 59.7 per cent from 55.6 per cent a year ago.
That came from lower cash operating expenses such as interconnection fees.
The bulls also argued China Mobile now looked cheap compared with global counterparts.
'Under our revised forecasts, China Mobile is trading [at] a 13 per cent discount to the global wireless average,' Merrill Lynch said, adding the counter was now trading at 22 times this year's expected earnings.
Shares in China Mobile have fallen 31.57 per cent this year and are off 63.56 per cent from a peak of $80 in March last year.
However, even the bulls admit the near-term upside is likely to be limited by concerns about declining revenue per user.
'At even low double-digit growth rates, we believe that China Mobile's stock price remains attractive,' ABN Amro analyst Joe Locke said.
'However, despite . . . our belief that there remains share price upside from a fundamental prospective, we are under no illusions that the share price will begin to perform anytime soon.
'By coming in below expectations of both the bulls and the bears, sentiment for the stock is at an all-time low.'
Part of the problem was investors had become blase about China Mobile's high growth, Salomon Smith Barney said.
'We believe that the market has started taking the success of China Mobile for granted. Two million-plus subscribers per month do not impress investors anymore,' the house said. 'In a high subscriber growth market like China, [average revenue per user] falls behind the importance of top line growth and margin sustenance.'
The bears, on the other hand, argued that the accelerating drop in revenue per user would squeeze out the effect of the increase in subscribers.
'The interim results show us that the revenue generated from these incremental subscribers is getting lower,' Kim Eng said.
Deutsche Bank said: 'We expected that beyond first half, the revenue and earnings growth rates would be overwhelmed by steep declines in [average revenue per user], rising churn rates and increasing marketing promotion and customers retention expenditure.'
Most analysts still prefer rival China Unicom, with its expected lower average revenue per user fall rate.