China Mobile

1H07 results beat market consensus; net profit up 26% yoy
China Mobile (CMHK) delivered strong interim results. Revenue was up
21.6% yoy to Rmb332.4b. EBITDA increased 14.6% yoy to Rmb89.8b. Net
income increased 25.7% yoy to Rmb37.9b, beating market consensus of 19-
24%. We foresee the company will deliver promising year-end results.
Maintain BUY.
Strong income growth. Total revenue increased 21.6% yoy to Rmb332.4b,
in line with the new subscription growth rate in the past 12 months. In
addition to strong subscription growth, the company believes the strong
revenue growth is supported by an increase in the usage of both voice and
value-added services (VAS). According to CMHK, the 19% voice tariff
reduction actually induced a 20% increase in minutes of usage (MOU). For
VAS, total revenue increased 35.5% yoy due to increases in SMS usage
(+41.0% yoy), together with a significant increase in WAP traffic (+167.1%
yoy) and MMS usage (+77.5% yoy). With all these factors working together,
the company managed to maintain its ARPU at Rmb88 even though the
proportion of free-incoming call package subscribers increased to 60% from
50% in early this year.
Rural subscriber growth will remain strong. Management indicated that
around 50% of new mobile subscribers came from rural region. As the
current rural penetration rate is just around 18%, which is still low compared
with 40% for the country, increasing affordability of mobile services should
ensure the rural market would be an important new subscription contributor in
the future.
EBITDA margin recovered from 51.3% in 2H06 to 53.9% in 1H07. We
foresee room for improvement would be limited as the company might need
to spend even more on sales and marketing in order to maintain its strong net
subscription growth in 2H07.
Higher capex forecast. Management expects full-year capex to have a less
than 10% increase on top of the Rmb99.8b budget, as the company needs to
expand network capacity in order to cater to the increase in usage due to
strong subscription growth and continual increases in MOU. As a result, we
also slightly adjusted our capex forecast to Rmb108b in 2007 and Rmb100b
in 2008. This has a minor impact on our earnings forecasts.
No updates on 3G and A-share listing. According to Chairman Wang, the
company has not received any updates from the government regarding 3G
licensing matters. The company expects the TD-SCDMA network expansion
construction project to be completed by Oct 07, and will embark on trials after
receiving government notification. Regarding the A-share listing, Chairman
Wang reiterates his previous comment, that is, the company does not have a
schedule and it all depends on the government’s rules on red-chips’ return to
the A-share market.
Maintain BUY. Including a special dividend of 8.5 cents to compensate for
the effect on net income due to a change in depreciation policy, the company
has declared an interim dividend of HK$0.922/share. We believe the
company will maintain the 43% general dividend payout ratio in 2H07.
Together with another year-end special dividend, we expect the final dividend
to be HK$1.018/share. We believe the recent share price weakness due to
unstable market conditions and the re-weighting of HSI create a good
opportunity for patient investors to accumulate the stock at a reasonable price.
Reiterate our BUY recommendation with a target price of HK$107.60