China Mobile Limited
Presented by:
Jonathan Rook, Christopher Philippou,
Malik Vorderwuelbecke, Zeeshan Memon,
and Chetan Talwar
Agenda
• Country Profile
• Industry Status Quo
• Company Profile
• Industry Prospectus
• China Mobile Valuation
• Conclusion
China Mobile
• China Mobile is the dominant provider of wireless telephony
services in China
• Revenue Growth of 70% on average over the last 5 Years
• About 120 million subscribers – largest in the world
• China Mobile is owned 76% by China Mobile Communications
which is directly subordinated to the Ministry of Information
Industry (MII).
• China Mobile Communications is not really interested in
profits but the long-term success of the Chinese Phone
market
China – The Economy
• The Chinese Communist Party (CCP), still dominates the
entire political spectrum in China, and all important
administrative positions in the government are held by
party members.
• China is historically among the most conservative &
controlled cellular markets in the world.
• Economic Reforms have taken place in China:
- Privatization has grown
- Introducing capitalistic mechanisms to increase market
efficiency.
China – Recent Economic Trends
• Eastern Seaboard is the engine
of the Chinese Economy.
• Rapid Growth of China Mobile has
reflected rapid growth of Urban
China as a whole.
• Huge disparity between the rural
and Urban regions.
- Income
- Literacy
- Infrastructure
- Unemployment
China – Economics of the Future
• State policies of expanding domestic
demand and market demand are major
forces driving economic development.
• Infrastructure Investments – e.g.
investments on roads, property, and power
grids has risen 21.8%.
• China continues to be a large untapped
market, that has huge potential.
China‟s Telco Industry
• Over 200 million mobile phone subscribers
• Currently dominated by China Mobile with
70% of market share
• Closest competitor Unicom at 11%
• Low cost PAS (Personal Access System)
initiatives by fixed line operators
Government Involvement
• 70% of China Mobile owned by the
Ministry of Information
• Market subject to corrective interventions
• License uncertainties
• Minister of Information and foreign
competition
• MII breakup of China Telecom
Current Competition
• China Unicom intentionally created as a
state-owned competition for China Mobile
• Became a major threat after introduction of
multi-tiered tariff systems
• Introduction of its CDMA network services
in late 2003 likely to further intensify
competition
• CDMA provides navigation, M-commerce,
entertainment, and enterprise
Current Competition
• Chengdu Telecom experiencing extremely high
growth in its PAS networks with subscribers
increasing from 0 to 700K in a little over a year
• China Unicom offers a 10%-15% discount on its
GSM services compared to China Mobile
• It most now compete with PAS tariffs that are
70%-80% lower than postpaid GSM tariffs
• GSM currently accounts for 70% of world
wireless market
• GSM tariffs basis of strength and stability for
China Mobile
Future Market Concerns
PAS- “Little Smart”
1) Expansion to Major
Cities
2) Prepaid PAS
Price War- Increasing Regulatory
Increasing Competition DEMAND Costs
1) Unicom: Prepaid “Irrational
service Operators” 1) Spectrum Fee and
Number Fee
2) 3G: 2 new entrants
by 2005 2) USO Fee
Irrational Chinese Operators
• China Unicom and Mobile in Price War-
Increasing supply so readily that values
are falling
• Need for Increasing Marketing Costs
• Hurting China Mobile‟s ability to pass
Gov‟t Tariffs onto subscribers
PAS Expansion- Same Front Competition
• First Entry to “mega-cities”
with population > 5 million-
Will double Coverage
• High concentration of China
Mobile Users- Chengdu
• PAS Subscribers grew from 0
to 700,000 from March 2002
to February 2003
Red- PAS Entry
• Will have greater effect on
pricing and market share than
in past
Subscriber Base Changing
Subscribers in Million
80,000
70,000
60,000
50,000
40,000
Contract
Prepaid
30,000
20,000
10,000
-
2000 2001 2002 2003
Dwindling Value Per Customer
Average Revenue Per Unit
300
250
200
Contract
150
Prepaid
100
50
0
2000 2001 2002 2003
New Prepaid Wireless Competitor
• China Unicom: Will Add CDMA Prepaid
• Prepaid PAS
• Both in 2nd Quarter 2003 – Further
Consummation of Consumer Values
Next Generation CDMA
• China Unicom- Inside Track on W-CDMA 2000
Technology
• China Mobile- Catch-up Game
• NEW 3G Competition in 2004/2005
– China Telecom
– China Netcom
– Gov‟t Regulation- will split up net additions for 1st year
amongst all competition (23% for these)
Added Regulatory Costs
• Number and Spectrum- Competitive Fees
• USO Tariff
– Compensate Universal Service Provider for
constructing unprofitable lines in rural areas
– 0.6%-1% of Total Revenues
Decline in the Growth Rate
• Revenue growth will slow down due to:
– Drastically Increased Competition
– Lower revenue per user
– Consumers might strictly prefer prepaid
– Factors intensified in westward drive
Suppressed Growth
Sales in Million
RMB
250,000
200,000
150,000
100,000
50,000
0
1999 2000 2001 2002 2003 2004 2005
CapEx as crucial figure
• 3G Technologies assumed to reduce
CapEx growth soon
– GSM network needs to be completely
updated
– Only greenfield ventures made cheaper
• Consensus assumes western provinces to
be low on agenda
– PAS and Landline Operators have to be
fought for market share
Goldman Sachs Model
Sovereign Yield Spread: 0.023%
Risk Premium: 6.05%
Raw beta: 1.58
Riskfree rate: 3.93%
Cost of Equity: 13.66%
Cost of Debt
• Hong Kong Premium - Aa3 : 1.35%
• China Mobile – Govt. AAA : 0.75%
• Riskfree Rate : 3.93%
Cost of Debt : 6.03%
ADR Price Target
• Critical factors in Valuation:
• Revenue Growth
• CapEx
Current price: $10.03 24%
downside
Target price: $ 7.66 correction
Sensitivity of Key Variables
Turnover Growth
### 15% 16% 17% 18% 19%
Capex Growth
27% $ 6.53 $ 7.90 $ 9.31 $ 10.75 $ 12.24
28% $ 5.71 $ 7.08 $ 8.49 $ 9.94 $ 11.42
29% $ 4.88 $ 6.25 $ 7.66 $ 9.11 $ 10.59
30% $ 4.03 $ 5.40 $ 6.81 $ 8.26 $ 9.74
31% $ 3.16 $ 4.53 $ 5.94 $ 7.39 $ 8.87
Conclusion
• Beware of preconceptions
• Don„t follow the hype without Due
Diligence
• China not only big, but complex
• Business environment changing faster
than in G10