China Mobile Limited

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

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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. - PowerPoint PPT Presentation

Transcript of China Mobile Limited

Page 1: China Mobile Limited

China Mobile Limited

Presented by:

Jonathan Rook, Christopher Philippou, Malik Vorderwuelbecke, Zeeshan Memon,

and Chetan Talwar

Page 2: China Mobile Limited

Agenda

• Country Profile

• Industry Status Quo

• Company Profile

• Industry Prospectus

• China Mobile Valuation

• Conclusion

Page 3: China Mobile Limited

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

Page 4: China Mobile Limited

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.

Page 5: China Mobile Limited

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

Page 6: China Mobile Limited

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.

Page 7: China Mobile Limited

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

Page 8: China Mobile Limited

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

Page 9: China Mobile Limited

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

Page 10: China Mobile Limited

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

Page 11: China Mobile Limited

Future Market Concerns

Increasing Competition

1) Unicom: Prepaid service

2) 3G: 2 new entrants by 2005

PAS- “Little Smart”

1) Expansion to Major Cities

2) Prepaid PAS

Increasing Regulatory Costs

1) Spectrum Fee and Number Fee

2) USO Fee

Price War- DEMAND

“Irrational Operators”

Page 12: China Mobile Limited

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

Page 13: China Mobile Limited

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

Page 14: China Mobile Limited

Subscriber Base Changing

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2000 2001 2002 2003

Subscribers in Million

ContractPrepaid

Page 15: China Mobile Limited

Dwindling Value Per Customer

Average Revenue Per Unit

0

50

100

150

200

250

300

2000 2001 2002 2003

Contract

Prepaid

Page 16: China Mobile Limited

New Prepaid Wireless Competitor

• China Unicom: Will Add CDMA Prepaid

• Prepaid PAS

• Both in 2nd Quarter 2003 – Further Consummation of Consumer Values

Page 17: China Mobile Limited

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)

Page 18: China Mobile Limited

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

Page 19: China Mobile Limited

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

Page 20: China Mobile Limited

Suppressed Growth

0

50,000

100,000

150,000

200,000

250,000

1999 2000 2001 2002 2003 2004 2005

Sales in Million RMB

Page 21: China Mobile Limited

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

Page 22: China Mobile Limited

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%

Page 23: China Mobile Limited

Cost of Debt

• Hong Kong Premium - Aa3 : 1.35%

• China Mobile – Govt. AAA : 0.75%

• Riskfree Rate : 3.93%

Cost of Debt : 6.03%

Page 24: China Mobile Limited

ADR Price Target

• Critical factors in Valuation:• Revenue Growth• CapEx

Current price: $10.03

Target price: $ 7.66

24% downside correction

Page 25: China Mobile Limited

Sensitivity of Key Variables

### 15% 16% 17% 18% 19%27% 6.53$ 7.90$ 9.31$ 10.75$ 12.24$ 28% 5.71$ 7.08$ 8.49$ 9.94$ 11.42$ 29% 4.88$ 6.25$ 7.66$ 9.11$ 10.59$ 30% 4.03$ 5.40$ 6.81$ 8.26$ 9.74$ 31% 3.16$ 4.53$ 5.94$ 7.39$ 8.87$

Turnover Growth

Cap

ex G

row

th

Page 26: China Mobile Limited

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