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posted: 3/22/2014 8:11 AM

China mobile under pressure as IPhones, WeChat curb profit

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Bloomberg News

China Mobile Ltd. faces a triple whammy of apps, iPhone subsidies and regulations that likely will cost the world's largest carrier as much as $1.8 billion in profit this year.

The state-run phone company is contending with falling income as customers flock to free messaging applications like Tencent Holdings Ltd.'s WeChat and buy Apple Inc. devices at a subsidized discount. The government also will impose a new telecommunications tax as part of an effort to lower prices and improve customer service.

The headwinds come as China Mobile commits an estimated $34.8 billion to capital expenditures, primarily to build a faster network for consumers who use smartphones to shop, watch videos and play games instead of just making calls. The carrier is on track to post an 8.8 percent decline in profit in the year ending Dec. 31, according to analyst estimates compiled by Bloomberg.

"There's just no positive catalyst for China Mobile in the medium-term," said Neil Juggins, a Hong Kong-based analyst at JI Asia Research Ltd. who rates the company neutral. "It's hard to make a positive case to invest in China Mobile right now."

Alibaba Benefits

Companies including Alibaba Group Holding Ltd., the nation's biggest e-commerce company, and Youku Tudou Inc., owner of its biggest video websites, are benefiting as more Chinese go online to shop and find entertainment. Yet China's carriers have to build the Internet infrastructure that gives consumers access to those sites.

China Mobile rose 0.3 percent to HK$69.90 in early Hong Kong trading, matching the increase in the benchmark Hang Seng Index. Tencent rose 0.4 percent to HK$580.

In the coming year, China Mobile is projected to report an 8.8 percent drop in net income to 114.2 billion yuan, according to the average of 23 analysts surveyed by Bloomberg.

Rainie Lei, a Hong Kong-based spokeswoman for China Mobile, said the company couldn't comment on financial results ahead of the earnings release.

Costs to build a faster, fourth-generation network will increase China Mobile's capital expenditures by 13 percent to 215.7 billion yuan this year, Wang Jinjin, a Hong Kong-based analyst with UBS AG, wrote in a March 11 report.

iPhone Subsidies

"The hardest challenge is yet to come," Wang said. "We expect capex to rise, competition to increase, and margins to decline further. In short, incremental returns might not improve during the 4G era."

That's not the only new expense for a company with about 772 million subscribers as of January.

To lure new high-end users into data plans, China Mobile in December reached agreement with Apple to offer the iPhone after six years of negotiations. Sales began at retail outlets on Jan. 17.

China Mobile's costs for subsidizing smartphones, including the iPhone, will rise at least 20 percent to 36 billion yuan this year from 30 billion yuan last year, estimates Juggins at JI Asia.

It was becoming increasingly difficult for the carrier, which brought the mobile phone to rural China and the majority of its population, to not offer the iPhone.

Teddy Bears

As the last of the three state operators to sell the device, China Mobile's share of the nation's 1.24 billion wireless users was 62 percent at the end of January, down from about 75 percent when competitor China Unicom (Hong Kong) Ltd. introduced the iPhone in October 2009.

China Mobile's profit from subscriber data plans hasn't kept pace with costs as Internet companies like Tencent use new business models to expand services that compete with traditional carriers.

Tokyo-based Line Corp.'s free messaging app, which has more than 370 million subscribers, sells teddy bear icons and games with cute cookies and wicked witches to generate revenue.

China Mobile earned more than 7 percent of its mobile service revenue, or more than 40 billion yuan, from traditional text messages last year, according to estimates from Wang at UBS.

Fewer Texts

During the eight-day Chinese Lunar New Year holiday in January and February, the total volume of text messages sent through the three carriers dropped 42 percent from a year earlier to 18.2 billion messages, Wang wrote, citing data from the Ministry of Industry and Information Technology.

Those figures do not include apps like WeChat.

"China Mobile is facing not only greater competition from China Unicom and China Telecom, but also from private companies like Tencent or Alibaba," said Mark Natkin, managing director of Marbridge Consulting Ltd., a market research firm in Beijing.

Chinese authorities aren't making things any easier.

Premier Li Keqiang this month said China will impose a value-added tax on telecommunication services to replace an existing business levy. That change could cut 9 percent from China Mobile's net income, according to estimates from Ricky Lai, a Hong Kong-based analyst at Guotai Junan Securities.

Gome, Suning

The VAT would replace an existing business tax that is about 3 percent of revenue, said Christopher Lane, a Hong Kong- based analyst with Sanford C. Bernstein said March 5. The precise impact of the change will depend on the level of VAT, which is estimated to be between 6 percent and 11 percent, he said.

China Mobile also faces a new set of rivals after regulators awarded operating licenses to private companies including the HiChina unit of billionaire Jack Ma's Alibaba Group; Suning Commerce Group Co.; and Gome Electrical Appliances Holding Ltd.

Those licenses allow private companies to lease capacity from carriers and offer new types of services, packages and billing options to challenge the state-owned firms that own the wireless networks.

"Better customer service is not to be underestimated," Juggins said. "The telcos are slow bureaucracies. These new companies will be more nimble and adept at changing market strategies."

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