Transcript China Mobile Limited Presented by: Jonathan Rook, Christopher Philippou, Malik Vorderwuelbecke, Zeeshan Memon, and Chetan Talwar.

China Mobile Limited
Presented by:
Jonathan Rook, Christopher Philippou,
Malik Vorderwuelbecke, Zeeshan Memon,
and Chetan Talwar
Agenda
•
•
•
•
•
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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
Increasing Competition
1) Unicom: Prepaid
service
2) 3G: 2 new entrants
by 2005
Price WarDEMAND
“Irrational
Operators”
Increasing Regulatory
Costs
1) Spectrum Fee and
Number Fee
2) USO Fee
Irrational Chinese Operators
• China Unicom and Mobile in Price WarIncreasing 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 millionWill double Coverage
• High concentration of China
Mobile Users- Chengdu
• PAS Subscribers grew from 0
to 700,000 from March 2002
to February 2003
• Will have greater effect on
pricing and market share than
in past
Red- PAS Entry
Subscriber Base Changing
Subscribers in Million
80,000
70,000
60,000
50,000
Contract
Prepaid
40,000
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:
Risk Premium:
Raw beta:
Riskfree rate:
0.023%
6.05%
1.58
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:
Target price:
$10.03
$ 7.66
24%
downside
correction
Sensitivity of Key Variables
Capex Growth
Turnover Growth
###
27%
28%
29%
30%
31%
$
$
$
$
$
15%
6.53
5.71
4.88
4.03
3.16
$
$
$
$
$
16%
7.90
7.08
6.25
5.40
4.53
$
$
$
$
$
17%
9.31
8.49
7.66
6.81
5.94
$
$
$
$
$
18%
10.75
9.94
9.11
8.26
7.39
$
$
$
$
$
19%
12.24
11.42
10.59
9.74
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