Monitor

HERE WE GO in another rerun of the old story of analysts failing to spot that one of their darlings was no longer very sexy any more.

China Mobile shocked the market on Thursday with first-half numbers well short of expectations. It has since lost 22.41 per cent. But should it have been quite such a surprise?

After all it was widely known that 90 per cent or more of the legions of new subscribers were going for budget pre-paid plans. Not only that but it was cannibalising its own subscriber base. Postpaid subscribers were switching to prepaid to save money. Not surprising then that average revenue per user plunged 28.5 per cent from the end of last year to 158 yuan per month.

Most investment banks bought the company's story that while cheap tariff plans would mean lower average revenue per user (ARPU), that would be compensated for by higher growth in subscribers and minutes of usage.

It has not worked out that way however. Subscriber growth fell to 1.1 million in July, down from an average of 1.5 million per month. The interims showed average minutes of usage per subscriber had risen a miserable 1 per cent for post-paid subscribers since the end of last year and actually dropped 13 per cent for pre-paid.

Back in late June, when the stock was trading about HK$40, there were 10 buys on China Mobile, two holds and only one sell, according to JCF Group. The lone sellers were not one of the heavy hitters but Kim Eng Securities.

Kim Eng analyst Edward Fung put his finger on the ARPU problem. Why did his more highly paid peers fail to warn their clients they were riding for a fall by holding China Mobile?

There is the suspicion that analysts with the big houses could not make a negative call for fear of upsetting efforts to win investment banking mandates from Beijing. Perhaps some bullish analysts have been living in a time warp and have not realised that it is 2001 not 1999.

There has been an obsession with all kind of metrics such as ARPU and subscriber growth numbers. It is a milder form of the era when analysts were weighing up Internet valuations on page views. They have been left behind while the rest of the market has woken up from the dream time and is focusing on the bottom line.

For a much-vaunted growth stock such as China Mobile, the expectations are surprisingly modest. Even Goldman Sachs, the investment bank that took China Mobile public, forecasts earnings per share will grow only 11.11 per cent next year and 10 per cent in 2003. Nomura International actually believes earnings will decline 15 per cent next year before picking up 12 per cent in 2003, while Deutsche Bank puts the numbers at 8 per cent and 1 per cent respectively.

At its close of HK$27 yesterday China Mobile is trading at 20.6 times the earnings Deutsche is expecting this year. That is quite enough for that kind of growth especially considering the significant overhangs on the stock during the next 12 months or so. Investors have to factor in the possibility that Beijing will issue a third mobile licence. There is also the negative impact of calling-party pays to come and thirdly the fund-raising exercise for the acquisition of the final 18 provinces from China Mobile's parent.

China Mobile has 13 provinces now with 58.9 million subscribers, including all the rich coastal areas. The 18 extra provinces add only 27.8 million subscribers in the poorer hinterland. The extra provinces do not look good in terms of spending on infrastructure per subscriber and will cause a further drop in ARPU.

What we are seeing right now is not an 'over-reaction' by the stock market to disappointing results as some bulls claim. It is merely the removing of the fat from a bloated valuation. Don't bet on this being the bottom.

Jake van der Kamp is on holiday