China Mobile Mulls Inorganic Growth as Profit Fall Continues - Analyst Blog


A persistent fall in earnings over the last few quarters has prompted China Mobile Limited ( CHL ) to plan big ticket acquisitions to revive its financial distress. Reportedly, the world's largest carrier in terms of subscriber base is considering multiple options cushioned by a large cash base.

Despite its leading position, China Mobile has never quite made it big on the acquisition front - either internationally or in its home turf. Nevertheless, the carrier is now looking for opportunities that would strengthen its core business as its current market share has declined to 62.4% from 62.8% as on Jun 30, 2013.

China Mobile records few failed acquisition attempts in the past. In 2006, the carrier had abandoned its acquisition talks with Millicom International Cellular. Years later, a deal to buy a 12% stake in Taiwan's Far EasTone Telecommunications fell apart in 2013 due to ownership-related regulatory hurdles.

However, the company did make some successful buying attempts although none of them were big enough to boost its financials manifold. The Honk-Kong based company is now eyeing a 20% stake in Malaysian carrier Axiata after having bought an 18% stake in Thailand's True Corp.

China Mobile has been facing stiff competition in the Chinese wireless market as it offers mobile services based on Time Division-Synchronous Code Division Multiple Access (TD-SCDMA) technology, which is not adequately supported by popular handset makers including Apple Inc. ( AAPL ). The company has naturally lagged behind rivals like China Unicom (Hong Kong) Limited ( CHU ) and China Telecom Corp. Ltd. ( CHA ) in terms of iPhone sales.

This has been one of the main factors responsible for China Mobile's dipping performance. However, the rollout of 4G is bringing some respite to the company as it has boosted its subscriber acquisition.

Recently, China Mobile announced results for the first six months of 2014 with adjusted net income of RMB57.7 billion ($9.4 billion). Net income dropped 8.5% year over year owing to higher infrastructure cost and stiff competition. Total revenue climbed 7.1% year over year to RMB324.7 billion ($52.9 billion) mainly attributable to rapid growth of wireless data revenue, which was up by a massive 51.8%.

China Mobile has ample liquidity in its balance sheet as the company exited first-half 2014 with cash and cash equivalents of RMB73.9 billion ($12 billion). We believe acquisition of a core business, particularly in another country, makes a lot of sense as it will help widen its geographical presence along with hedging some of its domestic weakness. Alternatively, the carrier can invest in new growth opportunities in the telecom space like M2M (machine2machine), digital media or cloud.

China Mobile currently carries a Zacks Rank 3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: AAPL , CHU , CHL , CHA

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