Operating mobile telecom networks in the world’s most populous and fastest-growing major economy should be a recipe for growth. Indeed, for much of the Chinese industry’s short post-privatisation history, it has been just that.
China Mobile, the world’s biggest operator, with more subscribers than there are people in the US and Japan, has quadrupled earnings per share since 2001.
The latest round of earnings reports, however, suggests carriers may be hanging up on growth. China Mobile lifted first-quarter earnings 5.2% year on year — less than the rise in gross domestic product. China Telecom’s earnings slumped 27%.
Falling profitability seems odd since Chinese are buying phones by the cartload: average monthly net additions are running at 10.5m this year, according to consultancy BDA, up from 7.4m in 2008.
Profits are down because China Mobile plans to increase handset subsidies and target rural areas — a sure way of buying customers to the detriment of profitability. India is heading down a similar path. The country, adding 15m subscribers a month, overtook China as the fastest-growing market several years ago. Lo and behold, Bharti Airtel, India’s biggest mobile operator, reported a deceleration in net earnings growth on Wednesday to 21% compared with 26% for the full year.
Financial Times reports this is not what investors, including Vodafone of the UK with its stake in China Mobile, signed up for.
Sure, China’s industry still looks good on some metrics — margins on earnings before interest, tax, depreciation and amortisation of 43-53% are not to be sniffed at. But the industry realignment that gives a sporting chance to China Unicom, the traditional laggard, increases competition for the other two.
Third generation — 3G — technology is, finally, being ramped up — and, with it, big capital expenditure. When operators combine big spending plans with lower-spending customers, investors should watch out.
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