Author | You Li

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If we discuss the white horses in the current A-share market, China Mobile is undoubtedly one of them.

According to its latest Q2 2024 financial report, despite the sluggish overall consumption and financial economic conditions in the first half of the year, China Mobile maintained growth in its overall performance, with net profit growing at a rate of 5.1%, exceeding revenue growth by 4 percentage points. Under the same circumstances, China Mobile's better profitability means it also has more resources to achieve early layout.

From an industry perspective, operators are essentially engaged in infrastructure work.

Whether it's the computing power construction representing the "future" or the mobile signal towers and 5G base stations safeguarding the "present" service efficiency, the first-mover advantage and scale effect are both very pronounced. Whoever leads the pack and continues to expand their advantage through strong operation and maintenance capabilities will gain more initiative in subsequent competitions.

Of course, this also implies high sunk costs and R&D expenditures that are difficult to cap.

In 2023, China Mobile's capital expenditure approached RMB 150 billion, and while there was a decline in 2024, as of the first half of the year, China Mobile's capital expenditure was RMB 64 billion. However, combining this with its announced annual plan, the capital expenditure for the second half is expected to ultimately reach around RMB 100 billion, with an annual growth rate of approximately 10%.

China Mobile seems to be advancing amidst this "dynamic balance" of high inflows and outflows.

The telecommunications industry is a standard heavy asset industry, and operators are typically engaged in complex businesses. On one hand, they have significantly higher revenue scales than their peers, but on the other hand, their business models are highly competitive, and technological advantages are difficult to provide effective protection. Perhaps only by analyzing in depth can we understand the development logic of operators like China Mobile.

1

High Inflows and High Outflows

As we commonly observe, China Mobile, China Unicom, and China Telecom share the market, with China Mobile renowned for its broadest user base.

According to the latest data, China Mobile has 1 billion mobile subscribers and 309 million broadband users, of which 30% are gigabit broadband users. By the end of 2022, China Mobile had 514 million 5G users, with a penetration rate of 51.4%; by the end of 2023, this figure grew to 795 million, and the penetration rate increased to 80.2%.

For comparison, as of August this year, China Unicom had a cumulative total of 283 million 5G package subscribers, and its "Big Connection" user count was 1.091 billion.

During the same period, China Telecom had 421 million mobile subscribers, 343 million 5G package subscribers in August, and 195 million wired broadband subscribers.

Roughly estimating, China Mobile's overall size is approximately twice that of China Telecom and three times that of China Unicom. Additionally, China Mobile's total number of 5G base stations exceeds the combined total of China Telecom and China Unicom, and its computing power and technological research and development capabilities continue to play a role.

However, relatively speaking, when facing the challenge of price reductions initiated by Unicom and Telecom, China Mobile's issue of customer churn is also more prominent.

In 2023, China Mobile's household customer ARPU (Average Revenue Per User) increased by 2.4% year-on-year to RMB 43.1. In a market dominated by multiple players, blindly raising the average revenue per user may not be the optimal solution. A report by Caixin in March this year indicated that China Mobile's new customer count decreased by 510,000 in February, and many voices suggested that this was related to China Mobile's high-priced tariff packages.

Ye Feng, who has a China Mobile number, discovered during the New Year's Eve dinner that his original RMB 38 tariff package had somehow been replaced with a luxury RMB 298 package. "The various benefits, data, and voice minutes they gave me did indeed increase, but I'm usually either at work or at home, where there's WiFi everywhere, and I communicate mainly through WeChat. Spending money on these things is pointless," he said.

Another Beijing China Mobile user, Elva, also mentioned that when it came time to renew her broadband subscription, she discovered that the RMB 300 annual fee for her 200MB broadband package had skyrocketed to over RMB 1,000, leaving countless netizens like Elva heartbroken.

To address such issues, a group of "good Samaritans" has even emerged on social media.

Under the guidance of her niece, Ye Feng bombarded China Mobile's customer service hotline, overwhelming the customer service representative with terms like "number portability" and "number retention package." Then, led by her niece, he brought his ID and various materials to the business hall and demanded a change, finally canceling the RMB 298 luxury package.

Elva's approach was more suitable for beginners. She searched for "Beijing China Mobile Broadband" on Xiaohongshu and discovered that she could directly call 10086 to request a 30% discount coupon when renewing her subscription. The package price dropped from RMB 1,152 to RMB 384. Although it was still more expensive than the first year's RMB 300, Elva was satisfied.

Later, she learned that by following a certain script, some people could even apply for a free speed upgrade package. "Discounts are reserved for those who dare to fight for them," Elva couldn't help but exclaim.

2

The 'Tacit Understanding' Among the Three Major Operators

Ye Feng and Elva are not alone. As time passes and consumer spending habits change, more and more people have been "forced" to learn various tricks for dealing with operators.

However, being "in the know" doesn't necessarily translate to a better experience. Elva mentioned that although the China Mobile customer service representative did send her a discount coupon, they subsequently called her multiple times from different numbers for confirmation. "I received three calls in two days, and I got so annoyed that I ended up yelling at them. The price wasn't any cheaper than last year, and there was a lot of hassle," she said.

This situation is not unique to China Mobile; China Unicom and China Telecom also receive numerous complaints on social media platforms. On Heimao Complaints, there are a total of 3,005 complaints related to China Unicom and 2,433 related to China Telecom, with issues such as continuous deductions, unauthorized service charges, and unfair terms frequently mentioned.

In a sense, China's three major operators are "hand in hand" partners, and this is also true at the business level.

Comparing the mid-year reports of the three operators horizontally, they all showed stable growth in performance and increased profit levels.

In the first half of 2024, the revenue growth of China Mobile, China Unicom, and China Telecom was around 2.8%. China Mobile had the highest revenue at RMB 546.744 billion, while China Unicom had the lowest at RMB 197.341 billion, and China Telecom was in the middle at RMB 265.973 billion.

Benefiting from a smaller base, China Unicom showed strong growth in net profit attributable to shareholders, recording RMB 6.039 billion in net profit for the entire first half of the year, an increase of 10.9% year-on-year. China Telecom's net profit attributable to shareholders was 3.6 times that of China Unicom, at RMB 21.812 billion. As the "world's largest operator," China Mobile's growth rate exceeded its scale, with net profit attributable to shareholders increasing by 5.3%, albeit the smallest among the three, reaching RMB 80.201 billion. This was 13 times that of China Unicom and 3.7 times that of China Telecom.

However, setting aside the difference in size, China Mobile's profit margin stands out the most.

A comparative analysis shows that the gross profit margins of the three operators all maintained growth, with China Mobile having the highest net profit margin of 14.68% at the end of the first half of 2024, while China Unicom and China Telecom had net profit margins of 6.97% and 8.26%, respectively.

From a financial statement perspective, "cost reduction" played a major role in the "opening up sources and reducing expenditures." During the reporting period, both China Mobile and China Unicom saw a decline in capital expenditures, with the former at RMB 64 billion, a year-on-year decrease of 21.38%, and the latter at RMB 23.9 billion, a year-on-year decrease of 13.37%.

From a revenue structure perspective, China Mobile's strong growth in its "second curve" also provided ample room for rapid growth.

China Mobile's "second curve" digital transformation revenue reached RMB 147.1 billion, an increase of 11.0% year-on-year, accounting for 31.7% of communication service revenue, an increase of 2.4 percentage points year-on-year.

Before this, the individual market had always been China Mobile's primary revenue source. It took five years from 2018 to 2023 for the government and enterprise, household, and emerging markets to increase their revenue share from 23% to 37%. This included personal new businesses such as mobile cloud storage, smart home income, IoT income, and other application and information services, which generated RMB 143.1 billion in revenue in the first half of the year, an increase of 11.5% year-on-year, making it the fastest-growing segment.

In contrast, China Unicom and China Telecom are progressing at a slower pace. China Unicom's cloud computing and big data intelligence business, which it holds high hopes for, generated RMB 43.5 billion in revenue in the first half of the year, an increase of 6.6% year-on-year. China Telecom's industrial digitalization revenue increased by 7.2% year-on-year, accounting for 30.0% of service revenue, an increase of only 0.8 percentage points year-on-year.

3

The Allure of High Dividends

A report by Dolphin Investment Research pointed out that although China Mobile's revenue growth rate is far from that of emerging growth stocks, it is still favored by some investors due to its stable operations, declining capital expenditures, and high dividend yield. In particular, high dividends are highly attractive to investors in the secondary market.

As of the end of September this year, China Mobile's dividend yield was 4.21%, higher than that of China Unicom and China Telecom. Additionally, it had RMB 1.18 trillion in undistributed profits on its books, accounting for 52% of its market value, indicating that it is undervalued.

Looking back at historical data, China Mobile's cash dividend payout ratio increased from 61.8% to 71.6% between 2021 and 2023. Furthermore, the company has proposed to gradually increase the proportion of profits distributed in cash to over 75% of shareholders' attributable profits within three years starting from 2024. This is another boost for shareholders seeking stable dividends.

Fu Caijun, a researcher in the venture capital field, provided a simple classification of high-dividend assets. She believes they can be divided into three categories: value-decaying assets with long-term expected dividend reductions, steady-operating assets lacking surprises, and value-growing assets with long-term dividend increases. China Mobile is the perfect example of the third category.

"The depreciation amount in listed companies is not low, averaging around RMB 200 billion per year. However, there is a distinction between actual depreciation and reported depreciation. China Mobile's actual depreciation is roughly half of its reported depreciation, which is not bad. Moreover, China Mobile's annual net operating cash flow far exceeds its net profit. With declining capital expenditures, theoretically, its dividend payout ratio could exceed 100% in a few years. As long as stability is maintained, there is still significant investment value," she said.

According to the latest data, China Mobile currently has RMB 248.4 billion in cash deposits and over RMB 300 billion in readily realizable assets such as trading financial assets. Roughly calculating, China Mobile has over RMB 600 billion in funds that can be quickly disbursed.

Furthermore, China Mobile has consistently maintained a low debt ratio. During the reporting period, it had no interest-bearing loans, and its core liabilities consisted mainly of accounts payable, advance receipts, and lease liabilities. As of June 30, 2024, its asset-liability ratio was 32.1%, a decrease of 1.36 percentage points from the same period in 2023.

In general, investors share a similar sentiment towards China Mobile and the Yangtze River Power Company, both of which are considered the two most certain, stable, and sustainable stocks in the A-share market. Even though recent stock market volatility has significantly impacted China Mobile's performance, once the market stabilizes, it can still maintain a high price of HKD 77.7 per share and a market value of HKD 1.51 trillion.

Of course, China Mobile operates in a high-tech, heavy asset industry like telecommunications, where the challenges it faces are constantly evolving. A simple example is the Ministry of Industry and Information Technology's statistical announcement in 2019, which indicated that the demand for "second SIM card slots" had basically been met, and in 2020, telephone users even decreased by 5 million for the first time in history.

Given population trends, it is no longer realistic to continuously increase revenue contributions from individual users as in the past. Completing digital transformation and entering international markets offer more room for growth. In 2023, China Mobile's digital transformation revenue reached RMB 100 billion, an increase of over 30% year-on-year, showing potential as a new revenue growth point. But what about the future? The marathon of digital infrastructure construction continues.