China Mobile

Edmundo LozanoRyan MuellerApril 19, 2010

Company BackgroundLeading mobile services provider in

China

World’s largest mobile network

World’s largest customer base: 533 mil

Developer of the oPhone

In charge of developing TD-SCDMA

Stock InformationTicker: CHL

Price (May 12, 2009): $48.59

Number of Shares bought: 200

Current Price: $50.30◦Shanghai Index vs CHL

52-week range: $42.64 - $59.22

May 12, 2009Q1 Profits of $3.69 billionQ1 revenue increased 9.2%15-30% yearly annual growthHas near monopoly in ChinaCHL has 460 million subscribersOperating Margins: 35%Very healthy balance sheetDividend payout ratio: 43%

May 12, 2009Sell when one or more of the

following risk factors occur:◦Re-evaluate at $80◦If China floats is currency◦The Chinese government does

something to CHL or forces CHL to do something that is contrary to our best interests

Recent NewsAbout to invest $5.86 billion (in

USD) in Shanghai-listed Shanghai Pudong Development Bank

Has asked Apple for helpChina Mobile’s competitors are

selling android-based products and iPhone with WiFi capability◦WiFi access has recently been

allowed in China

WiFi and WAPIWAPI = Wireless Authentication

and Privacy InfrastructureChinese government has not

provided full specification on its encryption algorithm

Techies speculate there are “backdoor” capabilities that allow government to monitor its users – consortiuminfo.org

IndustryChina’s wireless penetration is

48.5%US wireless penetration is 85%Highly regulatedChinese gov’t encourages orderly

competitionNeeds licenses to expand into

new technology

CompetitionChina Unicorn (CHU)

◦Was granted license to operate 3G technology in China on Jan. 7, 2009

◦Launched 3G network on October 1, 2009

◦GSM and WCDMA◦Capabilities include fixed-line voice,

broadband internet, IT services, business and data communications services

◦Has an alliance with Apple to sell the iPhone in China

China Telecom (CHA)World’s largest wireline

telecommunications and broadband services provider

Mobile Voice189 million wireline subscribersMobile subscribers about 56

millionCDMA 2000

China’s 3G NetworkCHL:

◦ In charge of developing TD-SCDMA◦Delays in network growth◦Scarcity of handset devices◦Limited vendor support

Competitors: ◦Can use mature 3G technology◦Well-established vendor network w/support◦A large variety of handsets available including

popular 3G models◦Based on WCDMA and CDMA 2000

TD-SCDMA (CHL)China’s own proprietary 3G

networkNot backwards compatibleNot a matured networkClaims to be better suited for

densely populated areasWorld’s largest phone maker

Nokia has 1 model that offers TD-SCDMA

Not much information about it

CDMA 2000 (CHA)January 2002 – South KoreaBackwards compatible with GSMCDMA Development Group states

that there were 308 operators in 116 countries offering CDMA 2000

Can be smoothly upgraded from existing 2G networks

WCDMAOctober 1 – 2001 in JapanHas received extensive media

coverageSupported by international phone

vendors (like Sony, Apple, Nokia)

AT&TT – MobileBackwards compatible with GSMBased on GSM Technology

Legal/Regulatory IssueChinese government is forcing

CHL to develop TD-SCDMACompetitors are upgrading

existing GSM networksIn order to promote competition,

the gov’t has permitted CHU to lower its tariffs by up to 10% below the gov’t standard rates

CCID SurveyCCID is a Chinese professional

research and consulting firm◦Publicly traded

Survey was taken around October

Up to October◦CHL: 2.3 million subscribers (9

months) October Sales: 644,000

◦CHU: 1 million subscribers (1 month) October Sales: 1,000,000

Survey ResultsFirst Choice of 3G service provider

◦44.2 % China Unicorn◦26.2 % China Mobile◦18.4 % China Telecom

Best 3G network:◦58 % WCDMA◦14.1 % CDMA 2000◦4.3 % TD-SCDMA

Over half of the people surveyed did not want a 3G phone◦Main reason: Too expensive

Reasons for Sell Recommendation

Numbers looked great last year and numbers look great this year

Stock Price has been stagnantHighly Regulated by the Chinese Gov’tForced to develop China’s TD network

without access to current matured 3G technologies

Pays higher tariffs than competitorsHuge sitting cash flowGrowth is being constrained

More Reasons to SellCompetitors can offer cheaper

packages and have licenses to sell WCDMA and CDMA2000 (huge vendor support)

Very limited number of handsets available

TD is in its infancy (limited information)

Underperforming versus Shanghai Index

Market Share has decreasedAverage Revenue per user

declined 7%

4G?Long Term Evolution: AT&T has

announced its rollout of its LTE network in 2011

Compatible with WCDMA and CDMA2000 networks