Profits at China’s three main telecommunications network operators will likely get squeezed in the first couple of years of their expansion into 4G mobile services, according to analysts.
In a report released on Monday, Barclays cut its share price targets for China Mobile, China Unicom and China Telecom to reflect lower revenue forecasts for all three companies this year and next year.
“We see little incentive for China’s telco companies to focus on profit growth – 4G comes with all the excuses to [avoid doing] that,” said Anand Ramachandran, lead author of the Barclays report and the firm’s head of telecommunications, internet and media equity research for Asia, excluding Japan.
China Mobile, the world’s largest wireless network operator, introduced last week its high-speed 4G service on the mainland to much fanfare, following the company’s deal to sell Apple’s latest iPhones to its 4G subscribers. At the end of last month, China Mobile had 767.21 million total users, most of whom are 2G network subscribers.
Analysts expect competition to intensify when Unicom and China Telecom launch their respective 4G mobile operations later this year.
All three mobile network operators, however, are expected to bear higher costs for capital expenditure, marketing and subsidies as they rapidly expand 4G services across the mainland.
Barclays forecast China Mobile’s total capital spending to reach 200 billion yuan (HK$254.4 billion) this year, from an estimated 190.2 billion yuan last year, as it pushes for greater 4G coverage nationwide.
In contrast, the two other 4G network operators aim to roll out initially in major cities. China Telecom’s total capital outlay is predicted to rise to 100.7 billion yuan from 80 billion yuan last year, an Unicom’s to 89 billion yuan from 80.1 billion yuan.
Ricky Lai, a research analyst at Guotai Junan International, said 4G-related marketing and smartphone subsidies would increase for both premium and low-end handset packages as competition heats up.
“The profit margins for all three 4G operators will suffer,” Lai said.
China Mobile said last month it plans to sell between 190 million and 220 million smartphones this year, up from 155 million units last year. Half of the smartphones the operator intends to sell this year are for 4G network subscribers.
Ramachandran said China Mobile’s handset subsidies could top 50 billion yuan, compared with an estimated 27 billion yuan last year.
Barclays lowered this year’s forecast revenue for China Mobile to 636.75 billion yuan from its previous estimate of 643.29 billion yuan. Unicom’s was cut to 319.79 billion yuan from 321.39 billion yuan, while China Telecom’s was lowered to 343.29 billion yuan from 344.21 billion yuan.In addition, the firm’s share price target for China Mobile was lowered to HK$67 from HK$76. Unicom’s was cut to HK$11.50 from HK$14, while China Telecom’s was set at HK$4.10 from HK$4.50.
Another development that could affect the financial performance of the mainland’s three network operators is the introduction to the industry of a value-added tax (VAT).
The State Council implemented the VAT programme, which started as a province-by-province pilot scheme in 2012, to boost productivity in various industries and lessen their tax burden. Post and telecommunications, financial services and insurance, and construction and real estate are among those yet to transition to VAT.
KPMG said in June the increased tax burden would be short term.
“It is expected that after an initial settling-in period, customers will become more accustomed to the VAT being passed on, and providers will generate input VAT credits as part of their normal capital replacement and new investment activities,” the accounting firm said.
The recent decision by the Ministry of Industry and Information Technology to allow mobile virtual network operators (MVNOs), which are backed by various private enterprises, could also affect the mainland’s three nationwide telecommunications operators.
An MVNO is a wireless communications services provider that leases network capacity from an existing telecommunications operator.
The ministry approved last month an initial batch of 11 MVNOs, each of which has partnered with both Unicom and China Telecom, to deliver services in specified areas until the end of next year.
Barclays expected the MVNOs to launch in the middle of this year but saw them having no material impact on the three major operators in the near term.