China Mobile: Plans to Increase Cash Dividend Payout Ratio to Over 75% Within Three Years (Q4 2023 Earnings Call Summary)

CHINA MOBILE (600941.SH/00941.HK) released its 2023 fourth quarter financial report after the Hong Kong stock market closed on the evening of March 21, 2024 Beijing time, with the following key points:

The summary of CHINA MOBILE's 2023 fourth quarter financial report conference call is as follows. For an interpretation of the financial report, please refer to " CHINA MOBILE: Will the Decrease in Capital Expenditure Become a Cash Cow? "

I. Review of Core Financial Information:

II. $ CHINA MOBILE.HK Detailed Content of the Financial Report Conference Call

2.1. Key Points from Management's Statements:

1) Capital Expenditure: In 2023, capital expenditure amounted to RMB 180.3 billion, accounting for a decrease of 1.9 percentage points in proportion to telecom service revenue, at 20.9%. The company expects capital expenditure in 2024 to be around RMB 173 billion, a decrease of 4.0% from 2023, with capital expenditure as a percentage of revenue expected to drop below 20%. By the end of this year, the company plans to have opened 2.35 million 5G base stations and achieve a smart computing scale exceeding 17 EFLOPS;

2) 2024 Operating Targets: Increase of 80 million 5G users in the personal market/household market net addition of 18 million customers/government and enterprise market net addition of 4 million households;

3) Dividend Payout Ratio: The full-year dividend payout ratio for 2023 was 71%. To better reward shareholders and share the fruits of development, the company will fully consider profitability, cash flow, and future development needs. Starting from 2024, the profit distributed in cash over the next three years will gradually increase to over 75% of the profit attributable to shareholders for that year, striving to create greater value for shareholders.2.2. Q&A Analyst Q&A for China Mobile

Q: What is the pace of the landing of the Smart Computing Center in 2024? Will the newly added computing power use domestic GPUs? What types of customers will be attracted by this new capability?

A: The company is currently focusing on two main aspects: smart computing and general computing. After several years of development, the company has established a certain foundation in general computing, while progress in smart computing has accelerated in the past two years. This year, the company plans to deploy new smart computing equipment, with an expected increase in computing power by 70% to reach 700 million flops. Deployment has already begun and is expected to be completed as soon as possible. The procurement process will be phased and gradually implemented, with the first batch of equipment expected to arrive in April or May, followed by the rest of the equipment. Despite some procurement restrictions, the company actively supports localization and will take various measures to ensure the smooth development of smart computing as the foundation of AI, including open cooperation and leasing.

Q: How will the data team drive the openness and utilization of data elements in the company's future development? Does the company have a consolidation policy for data openness, and will it demonstrate demonstrative examples at the business level?

A: Several years ago, the Chinese government specifically discussed data elements, and with the widespread application of information technology, the role of data elements in various fields has become increasingly prominent. Data has become one of the important elements for building new productivity. The company's layout in terms of data has long been underway, especially with significant investment in the construction of a data middle platform. We have a team of 400-500 people dedicated to processing and managing data elements. Every day, we clean, process, and tag massive amounts of data, accumulating a large amount of high-quality data resources.

Last year, the company's data business revenue reached 5.34 billion, showing strong growth momentum. We also launched the Shulian Network project, using privacy computing and blockchain technology to enhance the credibility and security of data transactions. At the same time, we have built the Wutong Big Data brand, which has been widely used in various industries. Data is the foundation of AI, and training AI requires a large amount of data support. In addition, regarding the consolidation of data assets, the company will disclose relevant content in this year's financial report, although the current impact is relatively small, it may become a norm in the future. In short, gradually improving the openness of data elements is challenging.

Q: Please explain in more detail the breakdown of the company's R&D expenses, the main areas where these investments are used, and how these initiatives drive product and market growth?

A: We recognize that technological innovation is the new driving force for the company's future growth, so investment in research and development is crucial. Last year, we invested over 30 billion in technological innovation, focusing on research and development in strategic emerging industries. These industries cover the entire process from basic research to products and servicesIn the Chairman's report, the "basic 6" mentioned is combined with the company's own resources and service scope to form a technological innovation system. Research and development investment is mainly focused on basic research to meet national and corporate needs, while also laying an important foundation for future development. Additionally, we are committed to transforming scientific problems into technology and capabilities. For example, in the field of artificial intelligence, we have developed basic large models and domain models, combined with customer data for training, and launched industry models to empower AI services. We have also comprehensively restructured products and services in AI empowerment to enhance service quality and user experience.

Furthermore, as one of the world's largest operators, we also take on certain responsibilities by actively building large scientific facilities, such as the CHINA MOBILE Zero One Star and Star River projects, collaborating with global partners to research and validate space-air-ground integrated technology based on 6G. In summary, our research and development investment is mainly focused on strategic emerging industries and technological innovation.

Q: Regarding depreciation adjustments and its relationship with research and development?

A: The company's research and development investment is mainly divided into expense and capitalization. Among them, expense-based research and development investment accounts for the vast majority, accounting for over 80% of the total investment. This mainly covers expenses such as research and development personnel salaries.

The company has decided to adjust the depreciation period of 5G wireless and related transmission equipment from 7 years to 10 years starting this year. There are two main considerations for this decision. Firstly, according to Chinese accounting standards, depreciation refers to the recovery of asset value over a specific period of use, so the effective use period is crucial. Considering that the trial operation period of 5G assets has changed and the Chinese 6G promotion group has announced that 6G will develop synergistically with 5G in the future, 5G facilities will have a longer period of use in the future. Secondly, the current 5G technology is quite mature, and a 7-year depreciation period is too short. Therefore, this adjustment is also in line with accounting standards. The second consideration is that depreciation is an important part of accounting items, and accounting items require comparability of information. We know that our competitors have a 10-year depreciation period for 5G wireless equipment, while CHINA MOBILE has 7 years, leading to incomparability of information. Therefore, considering these two factors, we made the depreciation adjustment.

In terms of their correlation, as a company with strong profitability, CHINA MOBILE does not need to adjust or regulate profits through depreciation adjustments. Our profitability is well known. Secondly, the company conducts independent reviews and explanations of costs every year to determine which costs need to be increased or decreased. Therefore, whether depreciation and research and development expenses offset each other is not a simple issue. For the company, profits are influenced by various factors, including revenue, costs, and external investment income. For research and development investment, we must view it as a future investment, even if the current investment may not immediately generate corresponding income. For future development directions, the trend of depreciation will synchronize with capital expendituresAs capital expenditures gradually stabilize or decline, depreciation will correspondingly stabilize or decrease. In addition, we have comprehensively considered research and development investment, stable growth of traditional businesses, and rapid development of innovative businesses to make future revenue and profit forecast guidelines to ensure the company's sustainable and robust growth.

Q: With measures such as controlling shareholders increasing their holdings, companies repurchasing shares, and actively distributing dividends, the market value performance is good. Could you introduce the situation of market value and the future plans for market value management?

A: The emphasis on market value reflects the company's good development trend and effective utilization of capital market tools. For example, through methods such as repurchasing, increasing holdings, and distributing dividends, the company has demonstrated its determination to value market value management. In addition, the China Securities Regulatory Commission has recently increased its focus on market value management, requiring central enterprises, especially state-owned enterprises, to strengthen market value management and include it in assessment indicators.

In terms of building the company's fundamentals, CHINA MOBILE has made significant progress in cloud computing, network speed, intelligent technology, etc., which are the foundation of market value management. In the future, the company plans to increase the dividend payout ratio and utilize capital tools such as repurchases when necessary. Strengthening communication with investors and information disclosure is also part of the company's plan.

Market value management also involves adjusting valuation models, especially when significant changes occur in the company's business. Over the past decade, CHINA MOBILE's business structure has undergone significant changes, with the proportion of traditional communication service revenue decreasing significantly, and emerging businesses such as cloud computing and artificial intelligence becoming growth drivers. Therefore, investors and the company need to explore new valuation models to more accurately reflect the company's market value.

Q: What are the differences between 5G-A and 5G, 6G? What are the company's plans for 5G-A construction? How will this affect capital expenditures?

A: 5G-A is a step towards 6G, with 5G technology known for its three major characteristics of high speed, large connectivity, and low latency. 6G adds three new dimensions on this basis: integration of sensing, intelligence, and computation, forming the six core features of 6G. These features mean that 6G will not only continue to increase speed, reduce latency, and expand connectivity, but also integrate radar perception capabilities, deeply fuse AI technology, and incorporate satellite communication into its communication system, further broadening communication range and capabilities.

For 5G-A, it is seen as a key step in the transition from 5G to 6G. In 5G-A, we expect to see further improvements in speed, with uplink speeds reaching 1Gbps, and enhancements in other performance aspects. The company has clear investment and deployment plans for 5G-A technology, planning to cover over 300 cities, with this year's investment expected to reach 1.5 billion RMB.

5G-A will effectively drive traffic growth, as higher speeds and improved performance will attract more data-intensive applications. Secondly, it will promote product innovation, with the advancement of technology capabilities leading to the emergence of new products and services. Finally, 5G-A will create more application scenarios, as technological progress will open up possibilities for more innovative applications, thereby driving the company's revenue and profit growth continuously

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