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First annual profit drop in 14 years spurs China Mobile spending on 4G

A woman looks at the screen of her mobile phone while walking past a China Mobile sign in downtown Shanghai December 18, 2013 file photo. RE
A woman looks at the screen of her mobile phone while walking past a China Mobile sign in downtown Shanghai December 18, 2013 file photo. RE

By Paul Carsten and Yimou Lee

BEIJING/HONG KONG (Reuters) - China Mobile Ltd, the world's largest mobile carrier by subscribers, will spend more this year to bolster its 4G mobile network to counter its first annual profit drop in 14 years.

The company blamed pressure from messaging services like the WeChat mobile app from Tencent Holdings Ltd and said on Thursday it will increase capital spending by 22 percent to 225.2 billion yuan ($36.34 billion). One-third of this, or 75 billion yuan, will go to expanding the high-speed 4G service it launched in December.

China Mobile also said it plans to sell 100 million 4G devices and have 50 million 4G users by the end of the year, following the January launch of Apple Inc's iPhone on its network.

Costly subsidies, particularly for the iPhone, and the plan to raise capital spending, combined with a proposed value-added tax for China's carriers [ID:nL3N0M222K], could all weigh heavily on China Mobile's future profits as it tries to reinvent itself in the mobile Internet era.

China Mobile is betting however that subscribers will use larger amounts of data as more people connect using applications like WeChat that are carried on a user's data plan to avoid the SMS charges that were formerly lucrative sources of revenue for mobile carriers.

To build up the network needed to create that shift, capital spending will peak in 2014 and 2015 before declining in 2016, said Chief Financial Officer Xue Taohai at a press briefing on Thursday.

China Mobile executives also hinted that sales of the iPhone, which analysts had expected to reach at least 17 million units in the first year after the launch, are well below expectations.

"Most of our 1.34 million 4G users are using an iPhone," said China Mobile Chairman Xi Guohua. "It's just been getting started for one or two months. So far it's hard to tell how that will affect our business," he said.

For all of 2013, China Mobile's net profit fell to 121.8 billion yuan, the first drop since 1999, compared with a 125 billion yuan SmartEstimate of 31 analysts surveyed by Thomson Reuters. Operating revenue last year rose 8.3 percent to 630.2 billion yuan.

China Mobile's profit also fell to 30.3 billion yuan in the quarter ended December, as operating revenue growth slowed to 5.3 percent, hitting 167.2 billion yuan from a peak growth rate of 14.5 percent just six months earlier.

While revenue from data services in 2013 rose 24 percent to 206.9 billion yuan, voice revenue, which accounts for the majority of sales, shrank 3.4 percent to 355.7 billion yuan.

Compounding China Mobile's waning fortunes was a 6.5 percent drop in revenue from SMS text and MMS multimedia messages to 41.3 billion yuan in 2013.

"FIERCER COMPETITION"

China is the world's biggest smartphone market with more than 500 million mobile Internet users. Tencent's hugely popular WeChat app, known as Weixin in China, now has 355 million monthly active users Tencent said on Wednesday.

The mass adoption of smartphones has driven an increase in mobile data consumption, which has pushed China Mobile's average revenue per user (ARPU), a key industry measure of performance, down to 67 yuan in 2013 from as high as 71 yuan two years earlier.

"The exponential growth in mobile Internet...brought forward fiercer competition across the industry and an era driven by data traffic operation," Xi said in the earnings statement on Thursday.

With its 4G service and the iPhone launch, the company is trying to win back customers after its low-quality 3G service saw an exodus to smaller competitors China Unicom Hong Kong Ltd and China Telecom Corp Ltd.

Handset subsidies will jump 26 percent to 34 billion yuan in 2014, Xue said, as the firm aims to keep smartphone contract prices low in the face of competition from rivals.

It has seen some success. China Mobile gained 375 million subscribers in February while China Unicom only added 157 million users and China Telecom just 22 million new customers.

China Mobile's 776 million users made up 62 percent of China's 1.25 billion subscribers in February, but only 28 percent of these are signed up to more lucrative 3G contracts, by far the lowest proportion of China's three carriers.

China Mobile shares closed down 3.6 percent on Thursday after the earnings were released, versus a 1.8 percent drop in the Hang Seng Index.

(Editing by Matt Driskill)

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