China Mobile and China Telecom 1H08: Signs of Change Ahead

By: Charice Wang, Ovum
(Business News & Technology News, 4 Sep 2008)

Last week, all four major Chinese telcos released their half-year results. China Mobile, the biggest mobile operator, reported a half-year net profit of Rmb54.8 billion ($8 billion) and revenues rose 18% to Rmb196.5 billion ($28.8 billion). In contrast, China Telecom, the largest fixed operator, had a net profit of Rmb11.6 billion ($1.7 billion). Net profit growth from 1H07 for China Mobile and China Telecom respectively was 45% and -4%.

China Mobile: strong growth continues, but tougher times expected for 3G
China Mobile sustained its substantial growth trend in the mobile market, as per last year. With further expansion in the rural market, it had 82 million new subscribers since 1H07, which equates to an impressive 7 million new subscribers added each month.

We expect the dominant position of China Mobile will continue for a while, although its rivals will catch up. With a mobile penetration rate of just 45.6 percent in China, there is still room for subscriber growth. China Mobile can increase its customer base through successful marketing strategies in rural markets. In addition, it can continue to grow revenues through providing more value-added services (it currently holds 70 percent of the domestic mobile market). But given that its rivals China Telecom and China Unicom have aggressive plans in the mobile market, China Mobile's revenues and subscribers are likely to increase at a slower rate.

China Mobile is experiencing difficulties in providing 3G services. It is the only operator that launched trial 3G services using TD-SCDMA technology, which is not mature yet. Its rivals have all announced plans to launch 3G services in the coming months, but they will use CDMA2000 and WCDMA, which are more mature standards. This will bring challenges for China Mobile to compete in the 3G market.

China Telecom: broadband growth bodes well for bundles
As a result of increasing fixed-to-mobile substitution, China Telecom suffered a significant decline in fixed subscribers and voice services in 1H08. Its fixed line voice revenues, accounting for 56.5 percent of operating revenues, declined 11.8 percent. With a high increase in network operation costs, China Telecom's net profit fell 4 percent year-on-year.

However, one highlight of China Telecom's results was its strong growth in broadband. It saw net additions of 4.3 million, taking its total broadband base to 39.95 million, as well as an increase of 31.3 percent in broadband access revenues. This should help it to offer bundled services when it launches its mobile service soon.

China Telecom's next focus will be on launching its CDMA service, which it purchased from China Unicom under the state reorganisation plan. According to China Unicom's results, its CDMA business has seen an increase of over 80 percent in profit, at Rmb0.65 billion ($95 million) from Rmb0.36 billion ($53 million) in 1H07. This bodes well for China Telecom's first step into the mobile market.

A new picture for the mobile market late this year
Once the telcos' restructuring is finished in the next few months, China Telecom will finally enter the mobile market. The regulator will impose new measures to support new entrant China Telecom and small player China Unicom to compete with China Mobile. As we commented earlier this month, some regulations have been proposed by the regulator, including number portability and interconnection charges, which should assist China Telecom and China Unicom's competition.

In the meantime, we see China Mobile and China Telecom changing their strategies, which will have an impact on the mobile market:
- increasing infrastructure investment. China Mobile has received approval from the government to expand its 3G commercial trial services to an additional 28 cities next year. It needs a huge investment to extend its TD-SCDMA network to the largest cities in China. China Telecom is also building its trial CDMA2000 network in Guangzhou, to prepare for the launch of 3G services.

- slowing their overseas expansion. After restructuring, the major telcos will focus on the domestic market for their new 3G services. Hence expansion into overseas markets will become less of a priority.

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