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China Mobile’s Market Value August 15, 2006

Posted by NoWires in China, Wireless.

chinamobilelogo.jpg Woke up to the news that China Mobile is now the world’s largest telecom carrier in terms of market value, surpassing former leader Vodafone. Although China Mobile has had more subsribers than Vodafone for a while, it has less revenue $31B vs. $45B, and until recently is an almost exclusively Chinese market operator whereas Vodafone has a more global foot print. A closer look at some other KPIs, such as ARPU (Average Revenue per User), China Mobile trails Vodafone ~$25/month vs. ~$36/month in the latest quarter. And majority of China Mobile’s revenue comes from voice services, not the new sexy data services. So what gives?

Many attributed this high valuation to the growth expectations of the Chinese telecom market. This certainly is a factor – cell phone penetration rate in China is about 25%, comparing to >60% rate of the developed countries in which Vodafone operates. However I think investors have already learned to avoid the trap of multiply whatever revenue by 13 Billion to estimate the Chinese market: the 300 million cell phone users in China today represents most of the urban affluent population. In terms of total addressable market, there is not a vast void as the 25% penetration rate suggests.

The main driver for this high valuation is the strong competitive position China Mobile occupies in the Chinese market. Although there is a second mobile operator in China (China Unicom), China Mobile is by far the dominate player in China. It has been pushing others around with ease, be it competitors, content providers or value-added service proviers (SP). One clearly indication of this market power is the extremely high margin China mobile maintains: EBITDA margin of 54% vs. Vodafone’s 36%. As the flagship operator of the Chinese government, China mobile also enjoys strong backing of the government. This virtual monopoly is what the market paying the premium for.

However backing from the government is not without its drawbacks: top management of Chinese telcos are subject to frequent shuffling. For example, current CEO of China Mobile was the CEO of China Unicom, its main competitor, until he was re-appointed to his current post. Although they are independent companies in their own right, in the eyes of the administration, China Mobile and China Unicom are more like two departments of a single organization. Management talents are on a rotation program and can be freely moved among different telcos.

What competition?


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