China Mobile

China's 4G network operators face profit challenge in services expansion

Top three telecoms players on the mainland are expected to boost their capital expenditure and subsidies in their expansion into 4G services

PUBLISHED : Tuesday, 21 January, 2014, 10:44am
UPDATED : Wednesday, 22 January, 2014, 4:28am

Profits at the mainland's three leading telecommunications network operators are expected to be squeezed in the first couple of years of their expansion into 4G mobile services, analysts say.

In a report released on Monday, Barclays cut its share price targets for China Mobile, China Unicom and China Telecom to reflect lower revenue forecasts for them this year and next.

"We see little incentive for China's telecommunications companies to focus on profit growth - 4G comes with all the excuses to [avoid doing] that," said Anand Ramachandran, the lead author of the report and Barclays' head of telecommunications, internet and media equity research for Asia, excluding Japan.

China Mobile, the world's largest wireless network operator, introduced last week its high-speed 4G service to much fanfare, following the company's deal to sell Apple's latest iPhones to 4G subscribers.

At the end of last month, the company had 767.21 million users, most of whom are 2G network subscribers.

Analysts expect competition to intensify when Unicom and China Telecom launch their 4G mobile operations later this year.

All three mobile network operators, however, are expected to bear higher costs for capital expenditure, marketing and subsidies as they rapidly expand 4G services across the country.

Barclays forecasts China Mobile's capital spending will reach 200 billion yuan (HK$256 billion) this year, up from an estimated 190.2 billion yuan last year, as it pushes for greater 4G coverage nationwide.

In contrast, the other two aim to roll out initially in major cities. China Telecom's outlay is predicted to rise to 100.7 billion yuan from 80 billion yuan last year, and Unicom's to 89 billion yuan from 80.1 billion yuan.

Ricky Lai, a research analyst at Guotai Junan International, said 4G-related marketing and smartphone subsidies would increase for both premium and low-end handset packages as competition heated up. "The profit margins for all three 4G operators will suffer," he said.

China Mobile said last month it planned to sell between 190 million and 220 million smartphones this year, up from 155 million last year. Half of the smartphones the operator intends to sell this year are for 4G network subscribers.

Ramachandran said China Mobile's handset subsidies could top 50 billion yuan, compared with an estimated 27 billion yuan last year.

Barclays lowered this year's forecast revenue for China Mobile to 636.75 billion yuan from 643.29 billion yuan previously. Unicom's was cut to 319.79 billion yuan from 321.39 billion yuan, while China Telecom's was lowered to 343.29 billion yuan from 344.21 billion yuan.

In addition, its share price target for China Mobile was lowered to HK$67 from HK$76. Unicom's was cut to HK$11.50 from HK$14, and China Telecom's was set at HK$4.10 from HK$4.50.

Another development that could affect the financial performance of the three network operators is the introduction to the industry of a value-added tax.

The State Council implemented the value-added tax programme, which started as a province-by-province pilot scheme in 2012, to boost productivity in various industries and lessen their tax burden. The post and telecommunications, financial services and insurance, and construction and real estate industries are among those yet to switch to the programme.

KPMG said in June the increased tax burden would be short-term. "It is expected that after an initial settling-in period, customers will become more accustomed to the VAT being passed on, and providers will generate input VAT credits as part of their normal capital replacement and new investment activities," it said.

The recent decision by the Ministry of Industry and Information Technology to open the sector to mobile virtual network operators, which are backed by various private enterprises, could also affect the three telecommunications operators.

A mobile virtual network operator is a wireless communications service provider that leases network capacity from an existing telecommunications operator.

The ministry approved last month an initial batch of 11 such operators, each of which has partnered with both Unicom and China Telecom, to deliver services in specified areas until the end of next year.

Barclays expects the mobile virtual network operators to launch in the middle of this year, but see them having no material impact on the three major players in the near term.