China Mobile
(CHL) announced interim 2009 results today with reported net income of RMB55.3 billion (US$8.1 billion) or RMB2.72 per share, up 1.4% compared to RMB54.5 billion (US$8 billion) or RMB2.68 per share reported in the corresponding period a year-ago.

This tepid growth reflects the company’s expansion to the low-income rural segment, as well as intense competition in the second-quarter 2009 that contributed to lower subscriber growth on a year-over-year basis. China Mobile reported 45% year-over-year growth in net income in the first-half 2008.

The Chinese wireless behemoth reported revenue of RMB212.9 billion (US$31.2 billion) for the period, up 8.9% year over year, partly driven by increased contribution from value-added services (28% of total revenue). EBITDA increased 5.8% year over year to RMB109.9 billion (US$16.1 billion) with EBITDA margin equating to 51.6%.

The company’s value-added business, which includes SMS, Color Ring and MMS, continues to grow rapidly with revenue increasing 13.7% to RMB59.9 billion (US$8.8 billion). To further drive growth of its value-added business, China Mobile recently launched “Mobile Market”, an on-line store to offer a broad range of mobile applications. Usage fee revenue grew 9% year over year to RMB134.9 billion (US$19.8 billion), accounting for approximately 63% of the total revenue.

Chine Mobile added approximately 35.9 million subscribers (at an average monthly rate of 6 million) during the first-half 2009, and ended the period with 493 million customers. ARPU (average revenue per user) for the period was RMB75, compared to RMB84 a year ago. The decrease resulted from the company’s strategy to attract more rural subscribers to expand coverage regions.

China Mobile maintained its 43% dividend payout objective for the full year 2009 as the Board of Directors recommended an interim dividend of HK$1.346 (RMB1.187) per share.

During the first-half 2009, the company made significant progress in expanding 3G network deployments covering approximately 38 Chinese cities. At the end of the period, China Mobile had 959,000 3G subscribers. The company plans to spend RMB 58.8 billion (US$8.6 billion) on 3G network build-outs in 2009 and aims to deploy approximately 60,000 base stations across 238 cities. China Mobile recently revealed its plan to amass roughly 80 million 3G customers by 2011.

However, the company faces significant challenges moving forward from the aggressive 3G service roll-out initiatives by competitors China Unicom (CHU) and China Telecom (CHA). China Mobile operates the home-grown TD-SCDMA technology-based network compared to the widely popular international 3G standards used by its Chinese peers.

Maturity of the lucrative urban markets has directed China Mobile to expand its business in the rural areas, considered less affluent market regions of China with below 20% wireless penetration. As a result, margins may be challenged in future reporting periods due to lower ARPU. Nevertheless, expansion into rural markets remains one of the higher priorities for China Mobile as competition intensifies moving forward.

We assess that a leading wireless portfolio, broad network coverage, aggressive 3G service deployments and first-to-market advantage in value-added services will continue to establish China Mobile as the dominant wireless provider, far ahead of its nearest competitors.

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