CHINA_MOBILE(00941.HK)：THE_PEAK_IS_BEHIND-2013-01-17.ppt

11/12,1/12,3/12,5/12,7/12,9/12,TelecommunicationsSector,4,000,1,000,20,NA,15.9,2.0,NC,1M,(5),0,China Mobile(00941.HK)The Peak is Behind,16 Jan 2013Investment HighlightsSlowing revenue growth amid declining user market share.As thelargest mobile service provider in Mainland China,China Mobile mainlyprovides mobile communications and related services.Its revenue growthrate slowed in recent years,with falling market share of its mobile users ratefrom 74%in early 2009 to 64.6%as of end-3Q12.Chinas telecom industry is being pressured dually from bottleneck in,SELL(Initiation)Share Price:HK$88.90Target Price:HK$77.20CSI Research DepartmentJian ChenTel:(8610)60838585Email:Juntao GongTel:(8610)60838159Email:,user growth and being channelized.Declining mobile user growth rateand high mobile phone penetration rate suggest mobile user growth toencounter a bottleneck.We forecast penetration rate of 3G users in China,Price ChartTurnover(HK$mn),(HK$),will reach 23%by end-2012E,while sharp growth in 3G users willsignificantly boost data expenditure.Internet companies are gradually eating,6,0005,000,China Mobile LtdMSCI-China,100.090.0,market share from mobile carriers,thus preventing carriers from boosting,turnover amid fast 3G user growth and leading to the risk of beingchannelized.,3,0002,000,80.0,70.0TD-LTE is unable to help China Mobile regain competitive advantage.,The Companys strategy of creating synergies from“2G,3G,4G and WLAN”will make impact on user experience.Prior to 2015E,China Mobile is notexpected to gain a competitive advantage from the TD-LTE network.Weforecast that revenue contribution from the LTE business will not exceed 1%during 2012-15E.Even if the LTE network is constructed by its parentcompany,China Mobile will still stand to incur a loss of Rmb58.8bn during2012-15E.Sliding market share of mobile users puts China Mobiles earningsunder challenge.We project that before 2015E,China Mobiles 2G marketshare will remain stable,while its 3G market share will continue to decline.Its total market share is projected to fall to 50%,and the ARPU toRmb62/user.China Mobiles overall earnings are predicted to decline slowly.We forecast CAGR for the Companys revenue and net profit to be a mere0.5%and-3.7%respectively,during 2012-15E.Potential risks:Defensiveness in the context of uncertain domestic andglobal economies;breakthrough growth in Internet business;and faster-than-expected development of the TD-LTE industrial chain.,0Source:Bloomberg,CSILatest Key DataMSCI ChinaFF no of shares(mn)FF(%)FF market cap(HK$mn)52-week high/low(HK$)12M daily turnover(HK$mn)12M volatility(%)PEG 2012-14E(x)RoE avg 2012-14E(%)P/B 2012E(x)Net debt/equity 2012E(%)Performance(%)AbsoluteRel to MSCI-ChinaMajor Shareholder(%),60.06,6505,21425.94463,52791.8/71.61,462YTD 12M22 23(1)4,China Mobile Hong Kong(BVI)Ltd.AuditorKPMGIMPORTANT DISCLOSURE AT THE END OF THIS REPORT,74.06,2,China Mobile(00941.HK)Earnings forecast,valuation,and rating:Taking into consideration ofshrinking market share and sliding profits,we forecast the Companys2012-14E revenue to be Rmb562.5bn/573.1bn/565.3bn,corresponding to YoYgrowth rates of 6.5%/1.9%/-1.4%respectively.The Companys 2012-14EEBITDA is projected to be Rmb 259.6bn/263.5bn/257.9bn,with EBITDA growthrates of 3.4%/1.5%/-2.1%respectively.We derive a target price of HK$77.20for the Company based on 4.3x 2012E EV/EBITDA.Initiate with a SELL rating.Investment Summary,FY-end DecTurnover(Rmb mn)Chg(%)Net profit(Rmb mn)Chg(%)EPS(Rmb)Chg(%)PER(x)OCF/Share(Rmb)PCF(x)EV/EBITDA(x)DPS(Rmb)Yield(%),20104852317.31196403.95.95(4.9)1211.516.25.72.503.5,20115279998.81258705.26.265.21111.286.35.52.623.7,2012E5624666.51275341.36.351.31111.626.15.02.653.7,2013E5731381.91278260.26.360.21111.276.34.72.673.8,2014E565313(1.4)121340(5.1)6.04(5.1)1210.876.54.62.533.6,Source:Company announcement,CSINote:Closing price as of 15 Jan 2013;expressed in RMB unless otherwise specified,HK$1=Rmb0.80IMPORTANT DISCLOSURE AT THE END OF THIS REPORT,2005,2006,2007,2008,2009,2010,2011,2005,2006,2007,2008,2009,2010,1H2012,2011,Jul-09,Jul-10,Jul-11,Sep-09,Sep-10,Sep-11,Jul-12,Nov-09,Nov-10,Nov-11,Mar-09,Mar-10,Mar-11,May-09,May-10,May-11,Mar-12,May-12,Sep-12,Jan-09,Jan-10,Jan-11,Jan-12,1H2012,Revenue(Rmb100mn),Growth,YoY,Net profit(Rmb100,Growth,YoY,电信用户占比,users,China,users,China,3,China Mobile(00941.HK)Mobile Giant with Slowing Earnings GrowthChina Mobile Limited(together with its subsidiaries)is the largest mobile serviceprovider in Mainland China,boasting the largest number of mobile users and thelargest mobile communications network in the world.Its major shareholder isChina Mobile Hong Kong Company Limited,holds a 74.06%stake in the listedCompany through a wholly owned subsidiary China Mobile Hong Kong(BVI)Limited.The remaining 25.94%stake is held by public investors.The Companys revenue grew by 6.6%YoY to Rmb 266.5bn in 1H12,signalinga slowdown in growth.It recorded net profit of Rmb 62.2bn(+1.5%YoY)for thesame period.Its net profit growth rates declined significantly since 2009.TheCompanys EBITDA margin and net margin have been declining in recent years,to 46.2%and 23.3%respectively in 1H12.,Fig.1:Slowing growth of the Companys core business revenue,Fig.2:Net profit growth fell to 1.5%in 1H12,主营业务收入（亿元）,同比增速,净利润（亿元）mn),同比增速,600050004000300020001000,26%,22%21%,15%,10%,7%9%7%,30%25%20%15%10%5%,140012001000800600400200,28%,23%,32%,29%,2%4%,5%,1%,35%30%25%20%15%10%5%,0Source:Company announcements,CSI,0%,0Source:Company announcements,CSI,0%,Declining user market share is attributable to a lack of competitive edges in the3G network and end-user markets.The Companys mobile user market sharefell from 74%in early-2009 to 64.6%in Sep 2012,while its share of new mobileusers also fell to 45.1%.Fig.3:China Mobiles user market share declined constantly to 64.6%,100%4.6%90%21.4%80%70%60%50%,Percentage of移动用户占比Mobile,Percentage of联通用户占比Unicom,Percentage of users,China Telecom,14.1%21.2%,40%30%,74%,64.6%,20%10%0%Source:Company announcements and operating figures,CSIHowever,the Company has strong cash flow and solvency capability.In 2011,the Companys asset-liability ratio was 31.7%，while respective current ratio anddividend yield stood at 1.40 and 3.56%，which were all above industry average.The Company has top industry management and strong execution capability,which will provide more flexible options for its operations and futuredevelopmentIMPORTANT DISCLOSURE AT THE END OF THIS REPORT,Sep-12,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,1H2012,中国移动,中国联通,中国电信,中国移动,中国联通,中国电信,Telecom,Net profit,1,同比增长,Growth,4,China Mobile(00941.HK),Fig.4:The Companys asset-liability ratio is higher thanindustry average,Fig.5:The Companys dividend yield is higher than industryaverage,China Mobile,China Unicom,China Telecom,China Mobile,China Unicom,China Telecom,60.0%50.0%40.0%30.0%,4.00%3.00%2.00%,20.0%10.0%,33.1%,32.4%,33.0%,31.7%,1.00%,0.0%,0.00%,2008,2009,2010,2011,2008,2009,2010,2011,Source：Company announcements，CSI,Source：Company announcements，CSI,Note:Closing price as of 3 Jan,2013Carriers are under dual pressureRevenue growth suppressed by user growth bottleneckGrowth of revenue from core business of telecommunication industry has beenslowing in the past decade,thus leading to a slowing net profit growth forcarriers.China Unicom and China Telecom are forecast to increase their shareof profit in the future,while that for China Mobile is predicted to decline.,Fig.6:Core business revenue growth of the telecom sectorslowed down during 2000-2012,Fig.7:Net profit growth of the three major carriers sloweddown,12000 26.40%,电信收入(亿元)revenue(Rmb100mn),Growth rate,YoY,30%,1800,净利润（亿元）(Rmb100mn)83.2%,同比增长率rate,YoY,10000,25%,16001400,0.8,8000600040002000,16.10%14.40%13.9%,12.6%11.8%11.7%,10.9%,7.0%,3.9%,6.4%,20%10.0%9.2%15%10%5%,12001000800600400200,36.2%19.4%13.0%8.4%-14.4%,32.2%-0.6%-13.8%,0.60.45.2%1.1%0.20,0,0%,0,-0.2,Source:MIIT,CSI,Source:MIIT,CSI.Note:abnormal data in 2008 and 2009 due to,restructuringGrowth rate of mobile users nationwide exhibited a continuous downtrend.At ahigh 80.6%,the mobile market penetration rate shows signs of stabilization.Based on the mobile popularization history of developed countries,we forecastthat growth of China Mobiles penetration rate will slow down slightly,while itsuser growth rate will continue to decline.IMPORTANT DISCLOSURE AT THE END OF THIS REPORT,1992,1994,1996,1998,2000,2002,2004,2006,2008,2010,Sep-12,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,Oct-09,Oct-10,Dec-09,Dec-10,Oct-11,Dec-11,Jun-10,Jun-11,Feb-10,Feb-11,Apr-10,Apr-11,Feb-12,Aug-09,Aug-10,Aug-11,Apr-12,Jun-12,Aug-12,移动电话用户同比增长,新增移动电话用户（百万户）,日本,Mobile phone users,YoY growth in,US,中国,月度新增用户中3G用户占比,5%,5,China Mobile(00941.HK),Fig.8:Growth of mobile phone users during 2001-Sep 2012,Fig.9:Mobile phone penetration rates in China,the US,andJapan during 1992-2011(%),移动电话用户（百万户）(mn)YoY growth in mobile phoneusers,New mobile phone users(mn)新增用户同比增长new users,美国,Japan,China,1200,80.0%,70.0%,120.00,1000800600400200,60.0%50.0%40.0%30.0%20.0%10.0%0.0%-10.0%,100.0080.0060.0040.0020.000.00,0Source:MIIT,CSI.,-20.0%,Source:World Bank,CSI,Carriers facing pressure of being channelized in the 3G era3G user base in China grew rapidly while growth of 2G users eased.New 3Gsubscribers recorded growing share of total new subscribers in the past years.As several mobile apps sprung onto the scene,the percentage of voice servicesdived from 70%to 44%while that of data services surged.,Fig.10:New 3G subscribers as a percentage of total newsubscribers rose to 78.8%,Fig.11:Communication is just one of the most usedfunctions of mobile phones in the 3G age.,85%75%,3G subscribers as a percentage oftotal new subscribers(monthly),Mobile internetMobile RSS,65%55%,Video conferencing,Video,45%,Mobile SNS,Mobile newspapers,Streaming media,35%,25%,Mobile phone,15%-5%,Mobile blogging,WAP,Video phoneCurrent basic phonebusiness will accountfor a fraction.,Source:Company announcements,CSI,Source:China Academy of Telecommunication Research(CATR)of the,MIIT,CSIRising popularity of 3G technology and emerging internet-based communicationtools such as WeChat and Weibo(Chinese microblogging website)suppressthe markets of carriers traditional businesses(such as SMS and MMS).ROI oftelecom carriers declined as returns did not increase in tandem with growingvolume of content transmission.Based on those service plans offered by ChinaTelecom and China Unicom,data traffic is priced at Rmb0.07-0.3 per MB,farlower than that of traditional telecom services.A mismatching between volumeand prices was attributable to the core position held by carriers in the valuechain is threatened by various platform applications.The mobile-internet age issidelining carriers.IMPORTANT DISCLOSURE AT THE END OF THIS REPORT,Users,Users,6,China Mobile(00941.HK)Fig.12:Changes in positioning of carriers in the value chain.,Equipmentmanufacturers,Telecom carriers,TerminalProvider,Business/applicationPlatform,providers3rd party app,development,3rd party app,Mobile phone OS,Terminal,development,developmentChip manufacturers,Provider,Mobile phone OSdevelopment,Operators,Equipmentvendors,Source:China Academy of Telecommunication Research(CATR)of MIIT,CSITD-LTE is unable to help China Mobile regain competitive advantageChina Mobile accelerates the deployment of TD-LTEIn 2008，China Mobile still held a dominant position with its 50%-plus marketshare of revenue.In order to reform the unbalanced pattern of Chinas telecomindustry,carriers such as China Unicom and China Telecom in a relativelyweaker position need to make their own efforts of improving competitiveness,with the help of the regulatory authorities to establish and improve the system ofasymmetric regulation.In recent years,regulatory authorities in China havebeen imposing asymmetrical regulatory measures on China Mobile,such asrestrictions on entering into the wireline business,promotion of LNP policy,etc;recently,virtual operator licenses are going to be issued,private capital maybreak into mobile resale business,which will also have negative impact on theleading mobile carrier.When 3G licenses were issued in early 2009,China Mobile is required to deployTD-SCDMA network,which was at a disadvantage in terms of both the downlinkrate of network and the support from the industry chain.On one hand,Chinaheld independent intellectual property rights of TD-SCDMA,the governmentintended to use China Mobiles dominant position to provide strong support forthe development of TD-SCDMA;on the other hand,regulators hope to weakenChina Mobile,in order to enhance the degree of competition in telecom industry.,Fig.13:Market share of three main carriers revenues in 2008,Fig.14:Downlink rate of TD-SCDMA is the lowest among all,3G standardsChinaUnicomChina,T elecom,25%,ChinaMobile,ChinaTelecom,ChinaUnicom,21%,54%,China Mobile,Source：Company announcements，CSI,Source：CSI,Webpage photodownload,mail,mp3download,videodownload,IMPORTANT DISCLOSURE AT THE END OF THIS REPORT,、,7,China Mobile(00941.HK)However,in the era of 4G,we believe China Mobile will continue to deployTD-LTE network.As the performance of TD-LTE is better than TD-SCDMA,theCompany hopes to regain the competitive advantage by deploying TD-LTEnetwork.Therefore,the future competitive landscape between the three majorcarriers in China is closely related to when the 4G technology license will beissued.We view that regulators are keen to speed up the introduction of 4Gtechnology.China Mobile has significantly stepped up the pace of LTE building.We forecast that China Mobile will obtain the TD-LTE license by end-2013E.Fig.15:China Mobiles plan to establish the LTE network and MIITs comments on 4G licensing.,As of 21 Jul 2011,Mr.ZHANG Feng,In 2011,size testswere completed in sixcities,whereby over900 base stationswere built,By end-2012,plans are underway to expandsize tests in 13 cities,build over 20,000 basestations to realize F-band coverage inHangzhou,Shenzhen,and Guangzhou.,Plans to build over 350,000TD-LTE base stations to cover allcities above prefecture-levelnationwide.,Director General,Ministry of Industry,2 0 11,2 0 12,2014E,and InformationTechnology(MIIT)Communications,DevelopmentDepartmentmentioned that thetime of issuing of 4Glicenses will mainlydepend on the,Minister Miao Wei,Ministry ofIndustry and InformationTechnology mentioned on 8 Mar2012 that another two to three yearsis necessary before 4G licensescan be issued.,As of 10 Sep 2012,Minister Miao Wei,Ministry ofIndustry and Information Technology revealed thatChina will start issuing 4G licenses in around ayears time.,maturity of thetechnology.Source:Compiled by CSI from media sources including company website and Lacking competitive edges in the maturing TD-LTE industrial chainThe TD-LTE technology is basically mature.We forecast that the TD-LTEtechnology will be mature by early-2013E,by when the standards will beupgraded from sin