China Mobile: Falling into zero growth, a "trapped beast"? Too pessimistic!

China Mobile (600941.SH/00941.HK) released its third-quarter financial report for 2024 on the evening of October 21, 2024, after the Hong Kong stock market closed. The key points are as follows:

1. Revenue Situation: Slight decline. China Mobile's total revenue in the third quarter of 2024 was 244.714 billion yuan, a decrease of 0.1% compared to the previous quarter's 1.1% positive growth. The main reason behind this decline is the noticeable decrease in product sales revenue (such as mobile phone sales) for the past few quarters (a 7% decrease year-on-year).

2. Key Revenue Segment (contributing 57% of revenue): Communication mobile phones (including mobile data, phone charges, etc.) amounted to 139.8 billion yuan, a 3.3% decrease year-on-year, which is almost unchanged from the 3.5% decline in the second quarter.

The decline in mobile phone business is driven by a "price-for-volume" customer acquisition logic—despite having over 1 billion mobile users, nearly 4 million new users were added in a single quarter, with per user revenue of only 46.5 yuan, a 4.7% decrease.

The mobile business is not deteriorating marginally, and the non-wireless services derived from the mobile business (mainly broadband, accounting for 30%) still provide some incremental revenue for China Mobile, with a 10% year-on-year revenue growth this quarter, showing a very stable performance.

3. Profit Situation: Zero revenue growth this quarter, with an operating profit of 33.2 billion yuan, also at zero growth. The largest expenditure—operating expenses and network operation support costs—is relatively rigid and does not fluctuate with revenue, so in a scenario of zero revenue growth, there is no profit release.

4. On the investment points that investors truly care about: If we roughly consider fixed asset investment in the cash flow statement as the company's capital expenditure, and regard the outflow of funds for dividends and repurchases as the return to shareholders by $CHINA MOBILE.HK, Dolphin calculates that the company's after-tax cash profit has decreased by 8% year-on-year. Apart from the aforementioned difficulty in reducing rigid expenses, there has also been a slight increase in fixed asset investment outflows year-on-year.

Dolphin's Viewpoint:

China Mobile, known for its stability, seems to exhibit a slightly weak "appearance" this quarter. However, Dolphin views this so-called weakness as a normal fluctuation for the quarter.

Firstly, the main reason for the weak revenue growth is the less significant product sales; in the truly important mobile and broadband businesses, the company remains as stable as ever However, Dolphin Jun did notice that the wireless traffic sales volume of $China Mobile(600941.SH) in the second quarter was 422GB, and in the third quarter it was 428GB. The year-on-year growth rate of the two quarters is within 3%, indicating that the growth dividend of China's video internet traffic has come to an end.

With voice revenue declining and data usage growth reaching its limit, if data prices continue to decline, the revenue of China Mobile's entire mobile business will basically reach its peak. The only way left for the wireless business seems to be price wars, further snatching users from China Unicom and China Telecom, as seizing market share under better economies of scale will be easier.

Due to the business logic of mobile broadband, Dolphin Jun is not worried about any short-term single-user fee reductions by China Mobile for the purpose of attracting users:

a) In terms of long-term data fees, after the penetration rate and dividend of the consumer internet have been fully realized, and as the industry transitions to industrial internet in the future, with the streamlining of price transmission mechanisms and the reconfiguration of factors, Dolphin Jun believes that the risk of data fee reduction for consumers has greatly decreased. Essentially, when the downstream of the consumer mobile internet has matured, Dolphin Jun believes that there is no need to further reduce fees to benefit downstream users;

b) The continued price reduction at this stage is more understood by Dolphin Jun as China Mobile engaging in a price war to seize users with financial strength after the exhaustion of the mobile data dividend, slowly and steadily capturing user market share, which in the long term is advantageous for China Mobile once users are concentrated;

In a situation where overall demand is stable, Dolphin Jun is more concerned about the company's investment control and potential shareholder return trends:

a) Firstly, the short-term investment in 6G is not yet visible. Dolphin Jun uses EBITDA adjusted for depreciation and amortization expenses, minus fixed asset spending from the cash flow statement, to roughly estimate the after-tax cash "operating profit" for a quarter, presenting a very clear picture:

After exiting the 5G capital investment cycle, China Mobile is completely a high-cash-cow business with high certainty, with an average quarterly profit of 35 billion RMB in the first three quarters of this year, and the company's shareholder return ratio during this period has basically reached 85%.

b) As a business with market demand as stable as a rock but weak growth, the company's cash + financial assets related to capital production in the main business amount to as high as 440 billion RMB, accounting for 30% of its own market value in Hong Kong; due to having too much money, the company has virtually zero interest-bearing debt.

Currently, 85% of China Mobile's dividend payout ratio basically corresponds to its current market value in Hong Kong, equivalent to a shareholder return rate of around 6.5%. This return rate is still relatively good for RMB funds from institutions in the south that do not need to pay taxes on dividends Therefore, Dolphin believes that in the current deflationary environment, China Mobile is still one of the best choices for counter-cyclical dividends.

Here is Dolphin's specific analysis of China Mobile's financial report:

I. Is the dividend attractive?

Since China Mobile's revenue stream is usually stable, there is nothing particularly noteworthy. The current steady rise of China Mobile without significant retracement or small fluctuations is because investors see it as having gone through the high capital investment period of 5G, having a lot of cash on hand, and continuously creating high dividend prospects from cash profits.

Dolphin first looks at two important data points: its cash profits and its dividend situation.

1) How about cash profits?

We know that capital-intensive companies (such as BOE) may have good book profits, but they are actually virtual because these book profits may have already been used to purchase equipment and build production lines.

For China Mobile, Dolphin is more concerned about: excluding the real cash-type operating profits after accounting adjustments. Dolphin's method of restoration in the quarter is to add back depreciation and amortization expenses and subtract the outflow of funds for purchasing fixed assets (roughly treating this as capital expenditure). After obtaining the cash-type operating profit, deduct the company's reported tax rate to get the company's after-tax cash-type operating profit (note that interest income is not considered here as the company has too much cash and high interest income, but only the cash cow ability of the main business is considered here).

Firstly, it can be confirmed that currently, due to the gradual reduction of capital expenditures and relatively high depreciation and amortization, the company's cash-type operating profit is actually higher than the operating profit on the company's financial statements, indicating a stronger ability to make money.

Dolphin's after-tax cash-type operating profit in the third quarter reached 27 billion yuan, a year-on-year decrease of 8%. This is mainly due to the year-on-year decline in product sales on the revenue side and the rigidity of operating expenses, as mentioned at the beginning.

2. Is the dividend generous?

However, in the previous quarter, the company's outflows for dividends and repurchases reached 50.6 billion yuan. Over the past year, the dividend payout ratio relative to its after-tax cash profits has remained stable at 85%. With the company accumulating too much cash, during the user acquisition period, it used the accumulated profits to increase the dividend payout ratio to over 100%, which is logically reasonable.

If the macro environment remains challenging in the future, then China Mobile, as a company with relatively stable price retracement and dividend yield (A-share return rate of 4.5%, Hong Kong stock return rate of 6.7%, corresponding to a 10-year Chinese government bond yield of around 2%), remains a Chinese asset target with relatively certain returns amidst uncertainties

II. Revenue Situation: Slight Decline

In the third quarter of 2024, China Mobile's total revenue was 244.714 billion yuan, a year-on-year decrease of 0.1%. The company's revenue in this quarter slightly declined, mainly affected by the decrease in product sales and other income.

Breaking it down, the revenue from communication services in this quarter was 214.46 billion yuan, a year-on-year increase of 1%; while the revenue from product sales and other sources was 30.254 billion yuan, a year-on-year decrease of 7%.

Based on the current number of mobile phone users and the average monthly fee per user, Dolphin Jun estimates that China Mobile's revenue from mobile business in the third quarter was around 139.8 billion yuan, a year-on-year decrease of about 3%, similar to the second quarter. The number of mobile phone users reached 1.004 billion, an increase of 3.7 million compared to the previous quarter; the calculated average revenue per user (ARPU) for this quarter was 46.5 yuan, a year-on-year decrease of 4.7%.

Meanwhile, the number of users and revenue from broadband services showed good growth in this quarter. The number of broadband users reached 314 million, an increase of 4.8 million compared to the previous quarter; the estimated revenue from non-mobile communication services (including broadband) for this quarter was approximately 74.6 billion yuan, a year-on-year increase of 10%.

Overall, the decline in China Mobile's revenue this quarter was mainly due to the decrease in product sales such as mobile phones and set-top boxes. In the core communication business of the company, mobile revenue continued to decline by around 3%, while communication revenue from broadband and other services continued to grow.

III. Profit Situation: Operating Profit Flat Year-on-Year

3.1 Gross Profit Margin

In the third quarter of 2024, China Mobile's gross profit margin was 61.6%, a 0.1 percentage point decrease year-on-year, remaining stable. Dolphin Jun categorizes "network operation and support costs" and "sales product costs" as operating costs to calculate the company's gross profit and gross profit margin. There were no significant changes in these costs and revenue compared to the same period last year, and the gross profit margin remained relatively stable.

3.2 Operating Expenses

In the third quarter of 2024, China Mobile's operating expenses were 117.5 billion yuan, a 0.1% decrease year-on-year, basically following the changes in revenue. Dolphin Jun includes "sales expenses," "employee compensation expenses," "depreciation and amortization," and "other operating expenses" in the operating expenses;

1) Sales Expenses: 12.8 billion yuan in this quarter, a 6.3% year-on-year increase, accounting for 5.3% of revenue. The company increased sales expenses to attract more users 2) Employee Compensation Expenses: In this quarter, it amounted to 38.95 billion yuan, a year-on-year increase of 14%, accounting for 15.9% of revenue. Employee-related expenses in this quarter increased year-on-year, showing a certain degree of rigidity.

3) Depreciation and Amortization: In this quarter, it was 47.53 billion yuan, a decrease of 8.2% year-on-year, accounting for 19.5% of revenue. As the peak investment period in 5G and other areas has passed, the absolute value of depreciation and amortization for the company has shown a quarterly decline.

3.3 Net Profit

In the third quarter of 2024, China Mobile's net profit was 30.73 billion yuan, a year-on-year increase of 4.6%. The growth in profit mainly came from non-operating factors. Among them, the company's interest income increased by 12 billion yuan year-on-year in this quarter, which was the main source of profit growth. From an operational perspective, the company's revenue, gross profit margin, and expenses remained relatively stable. China Mobile achieved an operating profit of 33.2 billion yuan in this quarter, unchanged year-on-year.

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Historical articles on China Mobile by Dolphin Research:

Financial Reports:

• August 8, 2024: "China Mobile: One Billion Users Dancing Together, Trillion Revenue Setting Sail"
• March 21, 2024: Telephone Summary "China Mobile: Cash Dividend Ratio to Increase to Over 75% Within Three Years (23Q4 Telephone Conference Summary)"
• March 21, 2024: Financial Report Review "China Mobile: Will the Decrease in Capital Expenditure Become a Cash Cow?"

In-depth Analysis:

• January 4, 2024: "China Mobile, the Internet Water-Electricity-Heating that Makes Money Lying Down"
• December 19, 2023: "China Mobile, the Ironclad, Flowing Internet"

Risk disclosure and statement for this article: Dolphin Research Disclaimer and General Disclosure