China Mobile Earnings Drop Most Since 1999 on Costs
China Mobile Ltd. (941), the world’s largest phone company, posted its biggest decline in profit since 1999 on rising costs to build out high-speed networks and attract new users. Shares dropped.
Net income fell 16 percent to 30.2 billion yuan ($4.9 billion) in the fourth quarter, according to figures derived from full-year results released by the Beijing-based company today. That missed the 33.4 billion-yuan average of three analyst estimates compiled by Bloomberg.
Chief Executive Officer Li Yue is counting on a rapid shift to fourth-generation networks and introduction of popular devices like Apple Inc. (AAPL)’s iPhone to stem declining market share and boost data sales. The push is raising costs for everything from new equipment to smartphone subsidies as instant messaging apps like Tencent Holdings Ltd. (700)’s WeChat cut sales from voice and texts.
“The company is having to spend a lot of money on handset subsidies to boost subscriber growth,” Ricky Lai, a Hong Kong-based analyst at Guotai Junan Securities, said today after the earnings. “More and more people are using WeChat instead of the traditional services. This will continue and get more serious.”
Sales in the fourth quarter rose 10 percent to 167.2 billion yuan, from 151.8 billion yuan a year earlier. That compared with the 156.1 billion-yuan average of five analyst estimates compiled by Bloomberg.
Shares of China Mobile fell 3.6 percent to close at HK$67 in Hong Kong, the lowest since April 2009. The stock has dropped 17 percent this year, surpassing the 9 percent drop in the city’s benchmark Hang Seng Index.
“We face challenges brought about by an accelerated substitution effect in the traditional communications business by Internet services,” Chairman Xi Guohua said in a statement. “We will push forward with the transition of business development from voice to data.”
Competition with WeChat cut revenue from traditional text messages by 6.5 percent last year, Chief Executive Officer Li Yue told a press conference in Hong Kong today. The company got 7 percent of sales from traditional texts last year, down from 7.9 percent in 2012, and 8.8 percent in 2011, Chief Financial Officer Xue Taohai said.
China Mobile, which has 775.6 million subscribers, is the last of the nation’s three state-owned carriers to report results for the period. China Telecom Corp. (728), the third-largest, yesterday reported fourth-quarter profit rose 18 percent to 2.8 billion yuan. Second-ranked China Unicom (Hong Kong) Ltd. (762) on Feb. 27 reported net income rose 24 percent to 2.03 billion yuan.
Both the smaller carriers offered the iPhone before China Mobile. That helped them lure users and cut the largest operator’s share of the nation’s 1.24 billion wireless accounts to 62 percent at the end of February, from 72 percent in October 2009.
To stem the decline, China Mobile began building out a faster network last year. The carrier reached agreement with Apple to offer the iPhone in December after six years of negotiations and sales of the device at China Mobile outlets started Jan. 17.
Subsidies for all phones will rise 29 percent to 34 billion yuan this year with introduction of the iPhone being part of the reason, CFO Xue said.
“This is our first year with the iPhone so we are increasing the level of spending on subsidies,” Xue said. “This will establish a good foundation for our long-term development.”
Costs to roll out 4G service will boost capital spending 22 percent to 225.2 billion yuan this year, from 184.9 billion yuan last year, Xi told the press conference. Mobile networks will account for 44 percent of that total, up from 40 percent last year.
There will be a payoff as customers boost data use, with monthly average revenue per user on the new 4G network of about 180 yuan, compared to the average of 67 yuan on its older networks, CEO Li said.
“We’ve only just started,” Li told reporters as he left the conference. “Once service on our traditional networks starts to take up a smaller percentage of the total, and most of our users have switched over to 4G service, then our results will take a turn for the better.”
China Mobile plans to sell 200 million smartphones this year for its 3G and 4G networks, with about 100 million of them running the new 4G TD-LTE system, the company said. China Mobile will also release five company-branded smartphones this year, up from two last year.
The fourth quarter was the second-straight decline in net income for China Mobile, following an 8.8 percent drop in the third-quarter.
A weak second half led the company to post a 5.9 percent drop in net income for the full year. That is projected to widen to a 6.9 percent decline in 2014 with earnings to fall to 113.3 billion yuan, according to the average of 22 analyst estimates compiled by Bloomberg.
“Disappointing numbers..and weak guidance,” Tucker Grinnan, a Hong Kong-based analyst with HSBC Holdings Plc, said in an e-mail today.
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