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China Mobile Limited

China Mobile Limited

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China Mobile Limited

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Presentation Transcript

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

  2. Agenda • Country Profile • Industry Status Quo • Company Profile • Industry Prospectus • China Mobile Valuation • Conclusion

  3. 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

  4. 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.

  5. 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

  6. 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.

  7. 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

  8. 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

  9. 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

  10. 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

  11. Future Market Concerns • PAS- “Little Smart” • Expansion to Major Cities • Prepaid PAS Price War- DEMAND “Irrational Operators” • Increasing Regulatory Costs • Spectrum Fee and Number Fee • USO Fee • Increasing Competition • Unicom: Prepaid service • 3G: 2 new entrants by 2005

  12. 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

  13. 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 • Will have greater effect on pricing and market share than in past Red- PAS Entry

  14. Subscriber Base Changing

  15. Dwindling Value Per Customer

  16. New Prepaid Wireless Competitor • China Unicom: Will Add CDMA Prepaid • Prepaid PAS • Both in 2nd Quarter 2003 – Further Consummation of Consumer Values

  17. 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)

  18. 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

  19. 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

  20. Suppressed Growth

  21. 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

  22. 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%

  23. Cost of Debt • Hong Kong Premium - Aa3 : 1.35% • China Mobile – Govt. AAA : 0.75% • Riskfree Rate : 3.93% Cost of Debt : 6.03%

  24. ADR Price Target • Critical factors in Valuation: • Revenue Growth • CapEx Current price: $10.03 Target price: $ 7.66 24% downside correction

  25. Sensitivity of Key Variables Turnover Growth Capex Growth

  26. 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