Here's how China Mobile plans to combat weak voice service business

CNY42b alloted for its 4G network service.

According to Maybank Kim Eng, although China Mobile reported FY12 earnings ahead of our and market expectations, management reiterated that the group’s EBITDA and net profit margin outlook is deteriorating because its voice service business is experiencing falling rates. 

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Management plans to transform China Mobile into a voice+datatraffic+application service business. Therefore, it plans to build >200,000 TD-LTE base stations in preparation for a commercial launch of the TD-LTE 4G service this year.

Management also raised the group’s FY13F capex budget by 49%/CNY63b YoY to CNY190b, CNY42b or 22% of which will be spent on developing the TD-LTE4G network. We disagree with the consensus view that China Mobile will regain its earnings growth momentum after launching the 4G service.

We expect the WLAN data service to cannibalise mobile data and other value-added services. Higher network and depreciation expenses will also put earnings growth at risk. We maintain our negative earnings growth outlook.

Currently, there are about 280,000 TD-SCDMA 3G base stations in China, with a network utilisation of 24%. However, there are about 3.8m WLAN access points and over 800,000 2G GSM base stations (network utilisation: 71%).

Because of better 2G and WLAN service coverage and cheaper data costs, mobile subscribers tend to use 2G and WLAN data rather than 3G services.

As such, we anticipate that the 4G service will experience similar low network utilisation and cannibalisation issues, and is unlikely to raise ARPU or offer operating leverage to China Mobile.