According to the Chinese ministry of industry and information technology, China has the world’s largest mobile market in terms of subscribers. The market will continue to expand since mobile phone users in China are expected to increase from 1.11 billion in 2012 to 1.33 billion in 2015. China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU), China Telecom Corporation Limited (ADR) (NYSE:CHA), and China Mobile Ltd. (ADR) (NYSE:CHL) are the country’s top three telecom operators with market share of 20%, 14%, and 66%, respectively. Let’s see how these companies safeguard their market position in the competitive era.
Increase in 3G network adoption
On April 1, the Chinese Government formed a policy making it mandatory for all houses to have Fiber-To-The-Home, or FTTH, access. China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU) had 60 million subscribers in March, and after the issuance of policy, in June it had 62.57 million subscribers. The subscriber base will rise, thus it is working to improve its broadband speed through its existing fiber optic network, FTTH project. This will help the company to offer multimedia services like Video on Demand, Internet Protocol television, or IPTV etc. These services have a huge demand potential that will drive revenue for China Unicom’s broadband division to $769 million in this year from $696 million in 2012 and $842 million next year.
Therefore, the company will generate EPS of $0.53 this year up from $0.33 in 2012 and the dividend yield is to increase from 1.2% to 2.4% by the end of the year.
Adoption of cheaper smartphones to enhance 3G network
There’s a huge demand for cheaper smartphones as compared to high-end smartphones like the iPhone in the Chinese market. Thus, China Telecom Corporation Limited (ADR) (NYSE:CHA) has come up with a strategy to sell the cheaper 3G smartphones of Huawei, ZTE, and Lenovo that support its 3G network.
Nokia Corporation (ADR) (NYSE:NOK) is trying to expand its Lumia series smartphone at a lower price range; hence it launched Lumia 800C with China Telecom Corporation Limited (ADR) (NYSE:CHA) at around $200 cheaper than the iPhone. This will help China Telecom enhance its 3G service and smartphones and increase monthly mobile ARPU from $7.64 in 2012 to $8.25 this year and $8.83 in 2014.
China Telecom Corporation Limited (ADR) (NYSE:CHA) is also engaged in improving its broadband service due to strong backing from the Chinese Government to have FTTH access in all houses. It is aggressively investing in the expansion of its high speed FTTH network. As of June, the company had 95 million broadband subscribers, up from 93 million in March, after the issuance of the policy in April. Through the FTTH network, it will offer complimentary services like video on demand and IPTV to its broadband subscribers and attract more subscribers to enhance its subscriber base. This will boost its broadband division revenue from $10.75 billion in 2012 to $11.37 billion this year and $11.88 billion next year. This indicates a positive sign of the company’s ability to increase the payout to its shareholders.
Increase in adoption of smartphones will uplift data revenue
Currently, China Mobile Ltd. (ADR) (NYSE:CHL) focuses more on low-cost smartphone sales that prevents declining margins and incur minimal subsidy expenses. However, it is shifting focus to the sale of high end smartphones like the iPhone, which will lead to increase in its ARPU level, and bring in higher data revenue. It is currently negotiating with Apple Inc. (NASDAQ:AAPL) to provide its 3G service for iPhones. This deal is important for China Mobile in regards to boosting its 3G service that will uplift mobile internet service revenue from $10.85 billion last year to $15.30 billion this year and $20 billion in 2014.
Chinese government decides the mobile tariff price, not the market forces. Frequent changes in the tariff regulation force companies to limit their flexibility in changing the tariff prices in order to respond to the growing competition. However, this will not majorly affect China Mobile Ltd. (ADR) (NYSE:CHL) since it has the highest market share, and its other segments are performing well. The company expects to generate total revenue of $100 billion this year, up from $92 billion in 2012, and $106 billion in 2014.
Conclusion
The battle between three Chinese mobile operators is likely to continue. Nevertheless, the strategies adopted by the companies will help them to maintain their market position. Due to the introduction of new government policy, China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU) will continue to profit from its broadband division and increasing 3G adoption. China Telecom Corporation Limited (ADR) (NYSE:CHA)’s average monthly mobile revenue per user will increase in the future due to adoption of cheaper smartphones to enhance its 3G network service. Additionally, China Telecom will continue to benefit from its broadband service due to the FTTH network policy. China Mobile Ltd. (ADR) (NYSE:CHL) will continue to benefit from mobile internet service. Therefore, I recommend a buy for these stocks.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile.
The article When the Top 3 Chinese Telecom Operators Compete, You Win originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
