Oct. 21 (Bloomberg) -- China Mobile Ltd. became the world’s first phone company with more than half a billion subscribers as price cuts lured users, helping the carrier’s profit rebound from its only profit drop in a decade.

Third-quarter net income rose 2.6 percent to 28.6 billion yuan ($4.2 billion) from 27.9 billion yuan a year earlier, according to figures derived from nine-month earnings reported by the Beijing-based company yesterday. Sales climbed 9 percent.

China Mobile cut call fees and raised handset subsidies to attract 15.24 million users in the quarter as Chairman Wang Jianzhou expands in lower-income rural areas to fend off mounting competition from China Telecom Corp. and China Unicom (Hong Kong) Ltd. The stock fell in Hong Kong trading as earnings missed some analysts’ estimates, underscoring the slowing subscriber growth in the world’s largest phone market.

“I don’t think 500 million subscribers represents any sort of a plateau,” said Bertram Lai, who rates China Mobile shares “neutral” at CIMB-GK Securities in Hong Kong. “There is plenty of upside, although the growth in subscribers will be at a decreasing rate.”

China Mobile, the world’s biggest phone company by market value, fell 1.9 percent to close at HK$77.25 in Hong Kong as profit was about 1 percent below the median estimate of a Bloomberg survey of seven analysts.

No Growth

“China Mobile is delivering what its valuation reflects, virtually no earnings growth,” Macquarie Group Ltd. analysts including Tim Smart wrote in a report today. The earnings report prompted the bank to cut its projection for the company’s profit this year by 1.8 percent, while the prediction for 2010 net income was reduced by 3.2 percent. Macquarie also lowered its share-price estimate for China Mobile by 4.6 percent to HK$83.

China Mobile is the worst-performing stock among the three Chinese phone companies this year, having lost 0.7 percent. China Telecom, the country’s biggest fixed-line carrier, fell 2.6 percent to HK$3.72 in Hong Kong, trimming its advance this year to 29 percent, while Unicom, the country’s second-largest mobile-phone company, has gained 18 percent.

Profit at China Mobile declined for the first time since 1999 in the second quarter as the economic slowdown weighed on demand and the government reorganized the industry to raise competition. Fixed-line operator China Telecom acquired a network from Unicom to enter the wireless market, while China Unicom bought a landline business.

‘Earnings Growth’

In the three months ended September, the company’s subscribers increased phone usage in response to price cuts, signaling a recovery in consumption, CIMB-GK’s Lai said.

China Mobile’s third-quarter sales rose 9 percent to 114.1 billion yuan, according to derived figures. Earnings before interest, tax, depreciation and amortization, a measure of cash flow, increased 5 percent to 57.8 billion yuan, compared with the 58.1 billion yuan median estimate of four analysts in the Bloomberg survey.

“It will be very tough for people to get very excited about this set of results,” said Wendy Liu, who rates China Mobile shares “hold” at Royal Bank of Scotland Group Plc in Hong Kong. “Is a 2 percent increase that much different from a 2 percent decline? It will be tough for people to say they have turned around a corner.”

Added Users

The company had 508.4 million subscribers at the end of September, according to its Web site. That’s more than the populations of the U.S. and Japan. The company added 21.53 users in the third quarter of 2008.

China Telecom gained 7.5 million mobile-phone customers in the three months, compared with additions of 6.44 million in the previous quarter.

The carrier yesterday posted a 47 percent drop in third- quarter profit on an increase in spending to market mobile-phone services. Net income, excluding gains from fees China Telecom used to charge to install fixed lines, missed the median estimate of five analysts in a Bloomberg survey.

China Mobile’s spending this year will be focused on upgrading networks to enable them to offer integrated second- generation and third-generation services, the company said in March. The carrier will offer third-generation services in 238 cities by the end of the year, it said.

Handset Subsidies

The company’s handset subsidies will increase in the second half as the company seeks to sign up more 3G users, CLSA Ltd. analysts Elinor Leung and Timothy Chan wrote in a Oct. 16 report.

China Telecom started its 3G service in March and has expanded the high-speed network to more than 300 Chinese cities, the company said in August. Unicom this month began commercial 3G services, after starting trials in May.

High-speed mobile phones based on China Mobile’s OPhone operating system will go on sale before the end of the year, the operator said in August. Unicom, based in Beijing, said that month that it signed an agreement to offer Apple Inc.’s iPhone handset in China.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

Last Updated: October 21, 2009 06:08 EDT