Investors in China's listed mobile operators have had it easy. Increased numbers of mobile subscribers fuelled growth in earnings as China Mobile and China Unicom injected mobile operations in China's most developed coastal provinces into investment vehicles listed in Hong Kong and New York.
Even as the telecoms industry has slipped into global crisis, the telecoms party in China seems set to continue. While average revenue per user (ARPU) at China Mobile and Unicom has dropped dramatically, falling average expense per user has allowed China Mobile, in particular, to keep its margins among the best in the world. With more than 5m new mobile subscribers signing up every month in the first quarter of this year, the China market remains a compelling growth story.
But not all of the news is good. If projections from the Ministry of Information Industry for slowing growth hold, 2002 will be the first year in which the number of new incremental mobile subscribers falls – from 60m in 2001 to 55m in 2002. This would mean that the annual subscriber growth rate would slip from 71 percent last year to 38 percent in 2002.
Even China Mobile's gravity defying margins deserve a second look. While margins on earnings before interest, tax, depreciation and amortisation improved from 57.7 percent in 2000 to 60.1 percent in 2001, the increase was largely the result of a 38 percent reduction in leased line expenses. While leased line prices will continue to fall, it is unlikely that they will maintain this pace in the year ahead. In addition, the impact of further reductions will diminish as leased line charges take up an ever smaller percentage of overall operating expenses. In 2001, this percentage fell from 14.6 percent to 8.4 percent. At these levels, the impact of further cuts in leased line charges will be more limited. And cutting other expenses will be difficult in the years ahead as subscriber growth continues and competition intensifies.
New competition – expected to begin after China Telecom and China Netcom receive new mobile licenses in the next year to 18 months – will mean higher sales and marketing expenses and lower revenue per user as competition leads to price cuts.
With these challenges already laid out ahead of it, China Mobile is preparing to inject mobile businesses in another eight provinces – Anhui, Hunan, Hubei, Jiangxi, Sichuan, Chongqing, Shaanxi and Shanxi into its listed subsidiary, China Mobile (HK).
The listing of these provinces will give investors their first look at the mobile business in China's less developed interior, and they may not like what they see. With GDP per capita 24.2 percent below the national average in these eight provinces, it is not hard to see why most expect ARPU to be at a healthy discount to those in China's developed coast.
Investors should also expect to see a wilder form of price competition than they are used to in China's coastal provinces. China Mobile and Unicom have generally tried to keep a lid on price wars in their listed provinces, as neither company wanted news of excessive price cuts to weigh on its stock price. But in the unlisted provinces, the price war genie is already out of the bottle. After the listing of these provinces, it is unlikely that central management will be able regain control of tariffs easily from local managers who are focused on winning market share rather than profitability.
These newly listed provinces will test the ability of China Mobile to offer services to low-end subscribers profitably. If it stands up to the test, China's mobile growth story will continue to hold investors interests. However, if profits slip in the new provinces, subscriber growth won't be enough to keep the party going for much longer.
This article was written by Ted Dean, a managing director at BDA (China) Ltd., a telecommunications and technology consulting firm focused on China. BDA's website is www.bdaconnect.com.
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