China Mobile's net profit up a measly 0.3%

Rising operating expenses still linger.

According to Maybank Kim Eng, 1Q13 revenue rose 5.7% YoY but net profit only increased 0.3% YoY (largely in line with our and market estimate). While China Mobile’s unaudited key performance indicators for 1Q13 reaffirmed our view that it is unlikely to benefit from the 3G smartphone boom in China, flat 1Q13 earnings also suggest that its future earnings growth is at risk. 

Here's more:

We maintain our view that China Mobile’s earnings will fall in FY13F due to higher subsidies and marketing costs.

More 3G subscribers not translating to better ARPU. Cumulative 3G+2G subscriber additions for 1Q13 dropped 9% YoY to 16m, although China Mobile added 9.9m net 3G subscribers (+4% MoM, +232% YoY) in Mar 2013, and cumulatively, net 3G subscriber additions were 26.4m (+217% YoY) in 1Q13.

Also, 1Q13 blended ARPU dropped 3% YoY to CNY63. Therefore, we believe the conversion of 2G subscribers to 3G ones is resulting in higher subsidies and marketing costs, but not higher ARPU.

Majority of data traffic on WLAN, not mobile. Data traffic has continued to grow significantly, but mobile subscribers prefer to use cheaper WLAN rather than mobile data. We expect this to be a lingering trend, and therefore, ARPUs are likely to continue declining while revenue growth remains in the low single digits. 

Rising capex. Management is keen on rolling out the TD 4G service ahead of peers, and has increased its capex budget for this year for the development of a TD 4G network at the listed company level. Therefore, we expect management to continue raising capex in FY13F-15F.

Earnings to fall. We maintain our view that falling revenue growth and rising operating expenses will cause China Mobile's earnings to contract this year, especially as it has become more aggressive in gaining 3G market share at the expense of net profit margins.