China Mobile Profit Gain Capped by Costs to Add 3G Users

China Mobile Ltd. (941), the world’s largest phone company by users, posted a 2.5 percent rise in second-quarter profit as costs to add new subscribers to its third-generation network restrained growth.

Net income rose to 35.2 billion yuan ($5.8 billion) from 34.4 billion yuan a year earlier, according to figures derived from first-half results released by the Beijing-based company today. The profit beat the 33.9 billion-yuan average of four analyst estimates compiled by Bloomberg.

Chief Executive Officer Li Yue is luring subscribers to 3G with subsidies on a range of devices, including Huawei Technologies Co.’s Ascend P6 that is advertised as the world’s slimmest smartphone. Handset subsidies, which hit 14.2 billion yuan in the first half, and the rollout of 4G services are choking profit growth with the latest results marking the third time in four quarters that earnings rose 3 percent or less.

“The operating expenses really surged in the first half,” said Ricky Lai, an analyst at Guotai Junan International Holdings Ltd. in Hong Kong. “They still need heavy handset subsidies to propel subscriber growth and China Mobile is going to suffer from that.”

The company, the only one of China’s three largest carriers not to offer Apple Inc.’s iPhone, is expected to report its first annual profit decline in 14 years, according to analyst estimates. China Mobile and Apple are still in talks on the iPhone, Chairman Xi Guohua said at a press conference in Hong Kong today. The talks are on commercial details and technology for its fourth-generation TD-LTE network, he said.

Sales Surge

Second-quarter sales rose 15 percent to 168.4 billion yuan in the quarter. The company was expected to report revenue of 147.8 billion yuan, according to the average of six estimates in the Bloomberg survey.

“The results are weak” even while beating analyst estimates, Bertram Lai, an analyst at CIMB Securities in Hong Kong, said in an e-mail today. The slow pace of growth was “likely driven by handset subsidies.”

China Mobile rose 0.2 percent to close at HK$84.10 in Hong Kong trading. The shares have dropped 6.8 percent this year while the benchmark Hang Seng Index is little changed.

The company is looking to mobile web users who download games and movies to help stem a decline in its share of the nation’s 1.18 billion wireless users.

4G Network

The carrier’s 740.2 million wireless subscribers accounted for 63 percent of China’s total users at the end of June, down from 65 percent a year earlier, according to data the company released last month. Its share of the nation’s 1.18 billion wireless users has dropped from 68 percent two years ago.

China Mobile is backing smartphones to stem that decline. The company added 23.5 million 3G users in the quarter for a total of 137.9 million at the end of June, according to data the company released last month.

China Mobile’s 3G business is starting to gain traction,” Wang Jinjin, an analyst at UBS AG in Hong Kong, wrote in an Aug. 13 report. Data usage “has taken off driven by more smartphones since late last year.”

The carrier is also moving to add fourth-generation services.

China Mobile is actively preparing for commercialization of 4G, CEO Li said at the press conference in Hong Kong today. China Mobile has 15 handsets ready for service on the faster network with more than 100 models of 4G devices in development, he said.

Network Costs

After building a trial 4G network in 15 cities in 2012, China Mobile in February said it will expand that to 100 cities this year, with 200,000 base stations that can reach a population of 500 million people. China’s government may issue licenses for 4G commercial service toward the end of this year, the company said in March.

Some costs for the 4G rollout that were previously borne by its state-owned parent are now being shouldered by the listed unit, which will boost its capital spending 49 percent to 190.2 billion yuan this year, the company said in March.

First-half revenue from the sale of products more than doubled to 18.4 billion yuan, a category China Mobile previously treated as “incidental,” it said in today’s filing.

With rising costs for its high-speed networks, China Mobile has been reporting some of the weakest financial results since listing in Hong Kong in 1997. The company is projected to report a 1.3 percent drop in full-year net income to 127.6 billion yuan, according to the average of 23 estimates in the Bloomberg survey. The company last reported an annual decline in 1999.

China Unicom (Hong Kong) Ltd. (762), the nation’s second-largest carrier, on Aug. 8 posted a 41 percent jump in net income that beat analysts’ estimates. China Telecom Corp. (728), the third-biggest, reports results Aug. 21.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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