China Mobile: With Capital Expenditures Decreasing, Will It Become a Cash Cow?

CHINA MOBILE (600941.SH/00941.HK) released its fourth quarter financial report for 2023 (ending in December 2023) after the Hong Kong stock market closed on the evening of March 21, 2024, Beijing time. The key points are as follows:

1. Overall Performance: Stable operating condition. CHINA MOBILE's total revenue this quarter is 73.2 billion RMB, with total revenue reaching 233.75 billion RMB, a year-on-year increase of 9.3%, basically meeting market expectations (236.7 billion RMB). The revenue growth this quarter mainly came from the broadband business and application and information services. CHINA MOBILE's net profit this quarter is 26.3 billion RMB, a 2.4% decrease year-on-year. While revenue increased, profit declined mainly due to increased costs from network operations and product sales.

2. Business Segments: Half of the revenue from data traffic. The revenue of $ CHINA MOBILE.HK is mainly composed of communication services and product sales, with communication business accounting for over 80% of the revenue. With the growth in demand for data traffic driven by short videos and short dramas, the combined revenue from wireless data traffic and broadband business now accounts for about half of the company's total revenue.

3. Capital Expenditure: $ CHINA MOBILE.CN had a capital expenditure of 180.3 billion RMB in 2023, a 2.6% decrease year-on-year. Annual capital expenditure as a percentage of communication business revenue decreased to 20.9%. After the peak period of 5G construction, the company's capital expenditure will continue to decrease. The company expects a capital expenditure of 173 billion RMB in 2024, with the percentage dropping below 20%.

Dolphin's Overall View:

CHINA MOBILE's financial report this time is relatively steady. Although some data fell short of expectations, the company still delivered a relatively stable operating condition. Revenue continues to grow, while the decline in profit is mainly due to the growth in certain cost itemsFrom a business perspective, except for the continuous growth of the broadband business, all other businesses are relatively stable. Dolphin believes that with its user base and scale advantages, the company is expected to continue to expand its broadband business.

Regarding the investment in the company, it is mainly based on three points: 1) a stable large company; 2) a relatively high dividend yield; 3) a decrease in capital expenditure. Overall, this financial report still demonstrates the company's stable characteristics, and the current dividend yield of the company's Hong Kong stocks is still above 6%. Additionally, while capital expenditure is expected to decrease in 2023, the company has also provided an expectation for further decrease in capital expenditure in 2024. The decrease in capital expenditure is expected to enhance the company's performance from a financial perspective. Therefore, although the company's financial data is somewhat below expectations, Dolphin believes it does not affect the investment logic in the company.

Below is Dolphin's specific analysis of CHINA MOBILE's financial report:

I. Core Data: Stable Operating Conditions

1.1 Revenue

CHINA MOBILE's total revenue in the fourth quarter of 2023 was RMB 233.75 billion, a year-on-year increase of 9.3%, basically in line with market expectations (RMB 236.7 billion). The revenue growth in this quarter mainly came from the drive of the broadband business and application and information services business.

1.2 Gross Profit Margin

CHINA MOBILE's gross profit margin in the fourth quarter of 2023 was 58.5%, a year-on-year decrease of 4.2 percentage points. Dolphin considers "network operation and support costs" and "sales product costs" as operating costs, and then calculates the company's gross profit and gross profit margin. The increase in the speed of these two costs exceeded the revenue growth rate, leading to a decline in the company's gross profit margin.

1.3 Company Operating Expenses

CHINA MOBILE's operating expenses in the fourth quarter of 2023 were RMB 118.5 billion, an 8.2% year-on-year increase, basically following the growth of revenue. Dolphin includes "selling expenses," "employee compensation expenses," "depreciation and amortization," and "other operating expenses" in operating expenses;

① Selling expenses: RMB 13.5 billion in this quarter, a 10.4% year-on-year increase, accounting for 5.8% of revenue. The company's selling expenses have a strong correlation with revenue growth;

② Employee compensation expenses: RMB 39.7 billion in this quarter, an 18.7% year-on-year increase, accounting for 17% of revenue, with an increase in employee-related expenses this quarter;③ Depreciation and Amortization: In this quarter, it was 52.1 billion yuan, a year-on-year increase of 2.7%, accounting for 22.3% of revenue. With the peak investment period in 5G and other areas passing, the growth rate of depreciation and amortization has slowed down.

1.4 Net Profit

In the fourth quarter of 2023, China Mobile's net profit was 26.3 billion yuan, a year-on-year decrease of 2.4%. The decline in profit was mainly due to the impact of gross profit margin. The increase in network operating costs and product sales costs affected the company's final profit performance.

II. Business Segment: Half of the Revenue Comes from Data Traffic

China Mobile's revenue mainly comes from two parts: communication services and product sales. Since communication services have always accounted for over 80%, changes in the company's revenue and business are mainly related to the operational status of communication services.

Within communication services, the highest proportion is wireless data traffic services, accounting for nearly half. Other services include broadband services, voice call services, and SMS services.

2.1 Wireless Data Traffic Business

In the second half of 2023, China Mobile's revenue from wireless internet services was 183 billion yuan, a year-on-year decrease of 2.5%. Revenue from wireless internet traffic remained stable, fluctuating within +/-3%. Although benefiting from the increasing demand for short videos and other traffic, the decrease in unit price offset the increase in volume.

Breaking it down, in the second half of the year, China Mobile users used a total of 88.6 billion GB of wireless data traffic, a year-on-year increase of 15.9%; at the same time, the average tariff for data traffic once again dropped to 2.1 yuan/GB. The wireless data business continues to maintain an overall balance of increasing volume and decreasing price.

2.2 Broadband Business

In the second half of 2023, China Mobile's broadband business revenue was 60.7 billion yuan, a year-on-year increase of 19.3%. China Mobile's broadband business has been maintaining a growth trend, mainly due to the increase in market shareAs of the end of 2023, the number of broadband users of the company has increased to 298 million households, a year-on-year growth of 9.5%, which also indicates that the company's broadband revenue per user is also increasing.

2.3 Voice Call Business

In the second half of 2023, CHINA MOBILE's voice call business revenue was 34.3 billion RMB, a year-on-year decrease of 5.5%. CHINA MOBILE's voice call business is in a stable declining trend, mainly due to the partial replacement of traditional calls by video/voice communication methods.

In the second half of 2023, CHINA MOBILE's total call duration was 1.4697 trillion minutes, a relatively stable number. However, considering that the scale of mobile users is still growing, Dolphin Jun estimates that the average monthly call duration per user continues to decline to 242 minutes, indicating a decreasing demand for voice calls by users.

2.4 SMS Business

In the second half of 2023, CHINA MOBILE's SMS business revenue was 15 billion RMB, a year-on-year decrease of 0.7%. After being impacted by instant messaging apps, CHINA MOBILE's SMS business has now stabilized. Currently, the company's SMS business customers are mainly B-side customers such as banks. Dolphin Jun believes that there will still be demand for SMS business, but it will continue to remain stable.