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China Mobile Limited. Presented by: Jonathan Rook, Christopher Philippou, Malik Vorderwuelbecke, Zeeshan Memon, and Chetan Talwar. Agenda. Country Profile Industry Status Quo Company Profile Industry Prospectus China Mobile Valuation Conclusion. China Mobile .

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china mobile limited

China Mobile Limited

Presented by:

Jonathan Rook, Christopher Philippou, Malik Vorderwuelbecke, Zeeshan Memon, and Chetan Talwar

  • Country Profile
  • Industry Status Quo
  • Company Profile
  • Industry Prospectus
  • China Mobile Valuation
  • Conclusion
china mobile
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
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
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
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
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
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
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 competition10
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
Future Market Concerns
  • PAS- “Little Smart”
  • Expansion to Major Cities
  • Prepaid PAS

Price War-




  • Increasing Regulatory Costs
  • Spectrum Fee and Number Fee
  • USO Fee
  • Increasing Competition
  • Unicom: Prepaid service
  • 3G: 2 new entrants by 2005
irrational chinese operators
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
pas expansion same front competition
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

new prepaid wireless competitor
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
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
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
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
capex a s crucial figure
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
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%

cost of debt
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
ADR Price Target
  • Critical factors in Valuation:
      • Revenue Growth
      • CapEx

Current price: $10.03

Target price: $ 7.66

24% downside correction

sensitivity of key variables
Sensitivity of Key Variables

Turnover Growth

Capex Growth

  • Beware of preconceptions
  • Don‘t follow the hype without Due Diligence
  • China not only big, but complex
  • Business environment changing faster than in G10