Moody's: 4G License Is Credit Positive for China Mobile
Published on: 9th Dec 2013
By: Ian Mansfield
Moody's Investors Service says that the Chinese government's decision to issue a TD LTE or 4G license is credit positive for China Mobile as this will help strengthen its market position in the growing wireless data business.
On 4 December, China Mobile announced that the Ministry of Industry and Information Technology had granted its parent, China Mobile Communications Corporation (CMCC), permission to operate the TD-LTE business and China Mobile will assist CMCC in the construction and operations of the TD-LTE network.
China Mobile is likely to enjoy the first mover advantage in the TD-LTE business as it has been investing in the technology since early 2013, well ahead of its competitors.
China Mobile targets to build over 200,000 commercial-ready base stations and expand its network coverage to 100 major cities by the end of this year. It has already started trials in some of the major cities, including Beijing.
While its two major competitors -- such as China Unicom and China Telecom -- also obtained TD-LTE licenses at the same time, Moodys expects these companies to only start major investments in 2014.
In fact, these companies plan to use FDD-LTE -- an international standard used outside China -- as their mainstream 4G technology. However, the FDD-LTE licenses have not yet been granted and any delay in the issuance of the licenses will be advantageous for China Mobile.
Although TD-LTE is a home-grown technology, China Mobile is unlikely to be hampered by the lack of choice in 4G handsets, as was the case with its 3G technology platform (TD-SCDMA).
TD-LTE technology has been accepted internationally, with 59 operators and 54 manufacturers joining the global TD-LTE initiative as of H1 2013. In addition, 25 models of TD-LTE trial devices were launched and over 100 models are under development, of which 15 handsets are intended for commercial use.
Moody's believes that Apple's new iPhones have also become technologically compatible with TD-LTE, as well as TD-SCDMA, although China Mobile has not yet started selling iPhones.
The launch of TD-LTE is strategically important for China Mobile to strengthen its market position in the growing wireless data business.
China Mobile had about 759 million customers as of October 2013, of which 176 million were 3G customers. Its 3G subscribers are growing rapidly with over 100% growth since May 2013 on a year-over-year basis.
Moody's expects its wireless data business to continue its solid growth. The wireless data revenue has grown 62% in H1 2013 on a year-over-year basis. In H1 2013 the business accounted for 17% of its telecommunications services revenue, up from 11% in H1 2012.
However, China Mobile's market share for 3G services has been much smaller than its overall mobile market share. As of October 2013, its 3G market share was 45% (China Unicom 30% and China Telecom 25%) while its overall mobile market share was 62% (China Unicom 23% and China Telecom 15%), largely because of the use of TD-SCDMA despite the recent improvement in its 3G market share.
Moody's expects the launch of TD-LTE will help China Mobile improve its market position in the wireless data segment and slow the pace of declines in average revenue per user (ARPU), as the ARPU of data users tends to be higher.
The large investments in TD-LTE will continue to pressure China Mobile's cash flow. Moody's expects its adjusted free cash flow (FCF)/debt to fall to below 0% in 2013 and 2014 from over 60% in 2012.
Moody's expects that the company's adjusted capital expenditure as a percentage of revenue from telecommunications services will increase to over 30% in 2013 and 2014, from below 25% of its revenue in 2012.
Nevertheless, its overall credit profile will remain in line with its rating, supported by its solid overall operating and financial profiles, as well as its excellent liquidity. For example, Moody's expects China Mobile's adjusted debt/EBITDA to remain at approximately 0.3x.