China Mobile, a solid fortress, and the Internet, a flowing river

Despite a 15% decline in the Hang Seng Index since the beginning of 2023, CHINA MOBILE has managed to defy the trend and rise by nearly 30%. What special magic does CHINA MOBILE possess to outperform the market by over 40% during the same period?

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In the downstream internet ecosystem, where the video internet is dominating, the telecom operators who provide water, electricity, and gas have emerged as "money trees" by moving away from the peak of capital expenditure.

Especially the leading telecom operator, CHINA MOBILE, with its vast market in China, has become the world's largest telecommunications company. The company's annual net profit consistently exceeds hundreds of billions of RMB.

Tired of the internet frenzy, Dolphin Research followed this chain, refreshed its perspective, and took a look at the largest water, electricity, and gas company behind all internet companies in the upstream - CHINA MOBILE. How did it transform from a company that invested heavily every year into a cash cow?

CHINA MOBILE's business can be divided into traditional and emerging sectors. Although the company's emerging businesses such as IoT and cloud services are growing rapidly, its current performance still relies mainly on traditional services such as wireless internet, wired broadband, and voice calls.

Looking at the performance of CHINA MOBILE's various business segments, stability is the key word. With the development of the internet and the popularity of video software, although wireless internet services have replaced traditional phone calls and text messages, the company's overall revenue continues to maintain steady growth.

In the telecom operator market, CHINA MOBILE holds an absolute leading position. Among the current mainstream operator users, CHINA MOBILE's user base accounts for approximately half. In terms of capital expenditure, CHINA MOBILE also significantly surpasses the other two operators. Capital expenditure directly affects the company's investment in infrastructure, which will help the company maintain its industry leadership. Dolphin Research believes that CHINA MOBILE will continue to maintain its leading advantage in the telecommunications market. The company's performance on the operational side is expected to continue to improve steadily. However, as a capital-intensive industry, large capital expenditures will directly impact the company's final performance. Based on the current 5G construction investment of the company, CHINA MOBILE's annual capital expenditure is not expected to see a significant increase again.

As a stable leading operator, CHINA MOBILE's massive capital expenditures will also affect the company's cash flow situation, in addition to its operational performance. This article mainly focuses on CHINA MOBILE's core business, while the next article will focus on performance estimation and valuation, providing specific viewpoints on CHINA MOBILE. Stay tuned for more updates from Dolphin Research.

Here is Dolphin Research's detailed analysis of CHINA MOBILE:

I. CHINA MOBILE: "Stability" is the Key

CHINA MOBILE has become a "giant" with annual revenue exceeding 800 billion. Even during the pandemic, the company's revenue continued to grow steadily. "Stability" is the biggest label for the company's business development.

According to the financial report for the third quarter of 2023, CHINA MOBILE's current main business segments include wireless internet services, wired broadband services, voice services, short message services, and innovative services. Among them, the largest source of revenue for the company is wireless internet services, accounting for nearly 50% of the total revenue.

1.1 Wireless Internet Services

Although CHINA MOBILE's wireless internet services have shown relatively stable growth, it remains the company's largest source of revenue due to its massive scale.

How has the wireless internet services changed? Dolphin Research examines it from two aspects: volume and price.

1) Wireless data usage: With the rise of short videos and other applications, the wireless data usage of the company's users has been continuously increasing. In the past six years from 2017 to 2022, wireless data usage has grown more than tenfold. The latest data shows that wireless data usage is still growing at a double-digit rate.

2) Wireless Data Tariffs: Compared to the overall trend, wireless data tariffs have been continuously decreasing. From 2017 to 2022, the cost per GB has dropped from 29 yuan to 2.7 yuan, approximately 1/10 of the original price. Based on the latest tariffs, the cost of using one GB of data continues to decline.

Dolphin Research believes that in CHINA MOBILE's wireless data business, overall data usage will continue to increase, but the company will continue to lower prices. The overall scale of wireless data business will maintain a "stable and slight increase" status.

1.2 Wired Broadband Business

CHINA MOBILE's wired broadband business also maintains a growth momentum, with a faster growth rate than wireless internet access. Currently, residential broadband volume is larger than commercial, but the growth rate of commercial broadband is relatively faster.

From the perspectives of residential and commercial broadband:

1) Residential Wired Broadband: The residential market remains the main source of revenue for broadband services, accounting for over 80%. With the increase in residential penetration rate, the current growth rate has declined to single digits;

2) Commercial Wired Broadband: Although the commercial market currently has a smaller share, the growth rate is still in double digits, faster than the residential market.

Dolphin Research believes that the broadband business will continue to grow, with the growth rate of residential broadband relatively lower due to the increase in residential penetration rate. The commercial market will be the main growth driver for the broadband business.

1.3 Telephone Business

CHINA MOBILE's telephone business has entered a stable state after experiencing a decline. With the surge in wireless internet traffic, voice and video calls have taken up the time that was originally used for telephone calls. As the telephone business shrinks, its contribution to total revenue is now less than 10%.

From the perspective of both volume and price, let's look at the situation of the telephone business:

Telephone call duration: With the increase in voice and video calls, the duration of telephone calls has decreased. After experiencing a decline, the current telephone call duration has stabilized at around 3000 billion minutes.

Telephone call tariffs: The average tariff for telephone calls has also declined and is currently stable at around 0.025.

Dolphin Research believes that the increase in voice calls and other communication methods will still have an impact on the telephone call business. However, telephone calls will transition from a rapid decline in the early stage to a slow decline at present. In the short term, telephone calls will not be completely replaced by voice calls and other methods.

1.4 Short Message Service (SMS) and Multimedia Messaging Service (MMS) Business

With the popularity of social networking apps like WeChat, the daily usage of SMS and MMS by individual users has decreased. However, the growth of notification messages from banks, transactions, and other services has offset this decline. CHINA MOBILE's SMS and MMS business has remained stable overall, especially with continued growth in the enterprise and commercial markets.

II. Telecommunication Operator Market: CHINA MOBILE Takes the Lead

CHINA MOBILE's business has been steadily progressing, but where does the company stand in the overall telecommunication operator market? Let's look at it from the perspectives of market share and capital expenditure:

2.1 Market Share of Telecommunication Operators

The current market situation of telecommunication operators can be divided into two aspects: existing main businesses and future potential businesses.

1) Existing Main Businesses of Telecommunication Operators

From the company's business situation, the current main businesses revolve around mobile services and fixed-line services. Mobile services include wireless internet data, telephone calls, and SMS/MMS services, while fixed-line services mainly consist of wired broadband services. These are also the main sources of revenue for the company.

Mobile User Situation: As of the end of 2022, CHINA MOBILE has reached 975 million mobile users. It holds a dominant market share of 57.9%, meaning that more than half of the domestic users are customers of CHINA MOBILE.

Fixed-line Customer Situation: As of the end of 2022, China Mobile had a total of 272 million fixed-line users. Its market share was 46.1%, which is relatively lower than its share in the mobile user market, but still ahead of China Telecom and China Unicom.

Looking at both mobile and fixed-line users, China Mobile already holds nearly half of the market share in the telecommunications operator market. Especially in the mobile user segment, its user share is close to 60%. In the fixed-line segment, influenced by hardware facilities such as broadband access, China Mobile still has a share of over 40%.

2) Potential Future Business for Operators

In addition to traditional existing businesses, China Mobile's application and information services have been growing steadily in recent years, accounting for over 20% of its business. The number of IoT terminal users and IDC cabinets contribute to the growth of the company's innovative businesses.

IoT Terminal Users: As of the end of 2022, China Mobile had over 1 billion IoT users, accounting for nearly 60% of the overall market. The large number of IoT terminal users provides a quantitative foundation for the company's future development in the IoT business.

IDC Cabinets: As of the end of 2022, China Mobile had 467,000 IDC cabinets, accounting for 34.8% of the overall market. In terms of IDC cabinets, the three operators are relatively close, with their shares all around 30%.

China Telecom's Tianyi Cloud continues to maintain its position as the number one in the operator market, but the gap in revenue between China Mobile's cloud business and Tianyi Cloud is gradually narrowing. Dolphin Research believes that with its existing user base, CHINA MOBILE will continue to maintain its leading position in the telecommunications market. The number of mobile and fixed-line users ensures the stability of CHINA MOBILE's existing business. The number of IoT terminals and IDC cabinets also contribute to the development of the company's potential future business. Although CHINA MOBILE's cloud business is currently lagging behind China Telecom, the gap between the two is gradually narrowing.

2.2 Capital Expenditure of Telecom Operators

For telecom operators, capital expenditure is particularly important for business development due to the continuous investment in heavy assets. Here, we mainly focus on the changes in capital expenditure and the overall proportion of CHINA MOBILE.

1) Capital Expenditure of CHINA MOBILE

Looking at CHINA MOBILE's capital expenditure, the company's capital expenditure is currently stable at around 180 billion RMB. Historically, each round of license issuance has driven an increase in capital expenditure:

3G era: In 2009, the Ministry of Industry and Information Technology officially issued 3G licenses, and CHINA MOBILE's capital expenditure increased from less than 100 billion RMB to 120-130 billion RMB. This marked the start of infrastructure investment in the 3G phase.

4G era: At the end of 2013, the Ministry of Industry and Information Technology officially issued 4G licenses, and CHINA MOBILE's capital expenditure increased again from around 130 billion RMB to around 200 billion RMB. The 4G phase entered a peak period of infrastructure construction.

5G era: In 2019, the Ministry of Industry and Information Technology officially issued 5G licenses. After the peak of 4G construction, CHINA MOBILE's annual capital expenditure fell to around 160 billion RMB. The start of 5G construction led to another increase in capital expenditure, but it did not reach a new high. Overall, capital expenditure has remained stable at around 180 billion RMB.

Dolphin Research believes that as time goes on, CHINA MOBILE's investment in 5G will gradually decline before the start of the next round of 6G infrastructure construction. The average annual capital expenditure during this construction period may remain at around 180 billion RMB.

2) Comparison of Capital Expenditure of Telecom Operators

In terms of capital expenditure of the three major telecom operators, CHINA MOBILE is still in an absolute leading position. Looking at the full-year capital expenditure in 2022,

CHINA MOBILE's capital expenditure reached 185.2 billion RMB, surpassing the sum of China Telecom (92.5 billion RMB) and China Unicom (74.2 billion RMB). Although CHINA MOBILE holds about half of the market share in the current telecommunications user market, the company still maintains an annual capital expenditure of over 180 billion yuan. The significant investment in infrastructure helps to consolidate and enhance the company's market share. CHINA MOBILE is expected to continue to maintain its position as the top domestic operator.