China Mobile Network Costs Mean First Net Drop Since ’99

China Mobile to Boost Capital Spending as Parent Shifts Costs
A pedestrian using a mobile phone walks past a China Mobile Ltd. store in Beijing. China Mobile’s share of the nation’s total 1.12 billion wireless users fell to 64 percent in January from 66 percent a year earlier, according to data released last month. Photographer: Tomohiro Ohsumi/Bloomberg

China Mobile Ltd., the world’s largest phone company by users, may post its first annual profit drop in 14 years as its state-owned parent shifts costs that will boost the unit’s capital spending 49 percent.

China Mobile is projected to report a 2.1 percent drop in net income this year to 126.6 billion yuan ($20.4 billion), the average of 33 analysts’ estimates compiled by Bloomberg. The company, which listed in Hong Kong in 1997, hasn’t posted an annual profit decline since a write off on equipment triggered a 30 percent drop in 1999.

China Mobile is shifting to a fourth-generation network to stem a decline in market share among subscribers who use their handsets to watch movies and play games. Construction costs for a 4G trial network had been borne by the state-owned parent. Shifting that responsibility to the listed unit will boost its capital spending to 190.2 billion yuan this year, from 127.4 billion yuan last year, the company said yesterday.

“The 4G network will increase the 2013 operating expense, and affect” net income, Ricky Lai, an analyst at Guotai Junan International Holdings Ltd. in Hong Kong, said in an e-mail yesterday. “The capex in 2013 is higher than expected as the listed company will be responsible for the 4G capex expense instead of the parent company.”

The company’s budget for capital spending this year is 23 percent more than the 155 billion yuan median estimate of five analysts surveyed by Bloomberg News.

4G Trial

After building a trial 4G network in 15 cities in 2012, China Mobile’s state-owned parent last month said it will expand that to 100 cities this year with 200,000 base stations that can reach a population of 500 million people.

About 52 percent of the listed company’s spending on networks will be for the trial 4G system this year, with the rest being for 2G networks and Wi-Fi, Chairman Xi Guohua told a briefing in Hong Kong yesterday. Spending on the 3G network will still be covered by the parent company.

China’s government may issue licenses for 4G commercial service around the end of this year, Xi told the briefing.

“There is not going to be any revenue from the network this year because there aren’t any 4G licenses,” Neil Juggins, a Hong Kong-based analyst at JI Asia Research Ltd., said yesterday. “If there is no revenue, there will be no profit associated with this investment so the concern is that the company will see a drop in profit in 2013.”

Profit Rise

In the fourth quarter, China Mobile’s net income rose 6.1 percent to 36 billion yuan from 33.9 billion yuan a year earlier, according to figures derived from full-year data the Beijing-based carrier reported. Profit was projected at 32.3 billion yuan, according to the average of five analysts’ estimates compiled by Bloomberg.

China Mobile rose 0.2 percent to HK$83.35 in Hong Kong yesterday.

Chief Executive Officer Li Yue said in August he’d boost handset subsidies by 30 percent in 2012 to maintain his lead in smartphone users and attract customers to more profitable data services.

Both of the company’s rivals China Unicom (Hong Kong) Ltd. and China Telecom Corp. have lured high-end consumers with Apple Inc.’s iPhone, which doesn’t run on China Mobile’s 3G network.

The increased handset subsidies helped China Mobile add 12.3 million users of 3G data during the fourth quarter, according to figures the company released in January.

Music, Video

“The company shifted 3G handset portfolio to low-tier devices to drive 3G subscriber growth during the fourth quarter,” Alen Lin, a Hong Kong-based analyst with BNP Paribas Securities Asia, said in an e-mail.

Sales rose 5.3 percent to 151.8 billion yuan in the three months ended December, from 144.2 billion yuan a year earlier. The company was projected to report sales of 150.4 billion yuan, according to the average of five analyst estimates.

Wireless data traffic last year became “a major driver of operating revenue growth” and almost tripled in volume from the previous year, Xi said in the statement. Sales from wireless data traffic last year rose 54 percent to 68.3 billion yuan, accounting for 12 percent of total revenue, he said.

The company’s Mobile Market app store, similar to Apple’s iTunes, saw users and downloads increase “dramatically,” Xi said. The online store now has a total of 270 million registered users, and has recorded cumulative downloads of 600 million apps, he said at the press conference yesterday.

Still, China Mobile’s share of the nation’s total 1.12 billion wireless users fell to 64 percent in January from 66 percent a year earlier, according to data released last month. The carrier had 714.7 million mobile-phone subscribers at the end of January, including 95 million 3G users, it said.

— With assistance by Edmond Lococo

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