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China Mobile Limited Presented by: Jonathan Rook, Christopher Philippou, Malik Vorderwuelbecke, Zeeshan Memon, and Chetan Talwar.

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Presentation on theme: "China Mobile Limited Presented by: Jonathan Rook, Christopher Philippou, Malik Vorderwuelbecke, Zeeshan Memon, and Chetan Talwar."— Presentation transcript:

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 Increasing Competition 1)Unicom: Prepaid service 2)3G: 2 new entrants by 2005 PAS- Little Smart 1)Expansion to Major Cities 2)Prepaid PAS Increasing Regulatory Costs 1)Spectrum Fee and Number Fee 2)USO Fee Price War- DEMAND Irrational Operators

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 > 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 2 nd 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 1 st 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

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