China Mobile Limited

1
China Mobile Limited

• Presented by
• Jonathan Rook, Christopher Philippou, Malik
  Vorderwuelbecke, Zeeshan Memon, and Chetan Talwar

2
Agenda

• Country Profile
• Industry Status Quo
• Company Profile
• Industry Prospectus
• China Mobile Valuation
• Conclusion

3
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

4
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.

5
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

6
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.

7
Chinas 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

8
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

9
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

10
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

11
Future Market Concerns

• PAS- Little Smart
• Expansion to Major Cities
• Prepaid PAS

Price War- DEMAND Irrational Operators

• Increasing Regulatory Costs
• Spectrum Fee and Number Fee
• USO Fee

• Increasing Competition
• Unicom Prepaid service
• 3G 2 new entrants by 2005

12
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 Mobiles ability to pass Govt
  Tariffs onto subscribers

13
PAS Expansion- Same Front Competition

• First Entry to mega-cities with population gt 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
14
Subscriber Base Changing
15
Dwindling Value Per Customer
16
New Prepaid Wireless Competitor

• China Unicom Will Add CDMA Prepaid
• Prepaid PAS
• Both in 2nd Quarter 2003 Further Consummation
  of Consumer Values

17
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
• Govt Regulation- will split up net additions for
  1st year amongst all competition (23 for these)

18
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

19
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

20
Suppressed Growth
21
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

22
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

23
Cost of Debt

• Hong Kong Premium - Aa3 1.35
• China Mobile Govt. AAA 0.75
• Riskfree Rate 3.93
• Cost of Debt 6.03

24
ADR Price Target

• Critical factors in Valuation
• Revenue Growth
• CapEx
• Current price 10.03
• Target price 7.66

24 downside correction
25
Sensitivity of Key Variables
Turnover Growth
Capex Growth
26
Conclusion

• Beware of preconceptions
• Dont follow the hype without Due Diligence
• China not only big, but complex
• Business environment changing faster than in G10