China offers one of the most diverse wireless networks with limited disclosures and guidance, and a shifting regulatory framework. However, the China 3G story is working , as cheaper devices, data packages and mobile apps ecosystem drive a rapid transition to data services. China is a unique 3G market with three national networks, based on three different wireless network technologies, with almost no network sharing.
China 3G Subscribers & Revenue Growth
China is in the early stages of the transition to 3G smartphones and we see FY13 as a break-out year. Based on the April 2013 sub numbers, China has 293m 3G subs or just 25% of the total sub base of 1.15bn. China Telecom has been the most aggressive on the 3G transition, and with 48% of subs now on 3G that suggests the company will focus on higher quality net adds rather than just scale. China Unicom is in the middle position with 36.5% of subs on 3G but slowing momentum, while China Mobile brings up the rear with just 16%. The average data consumption per user is expected to rise 27% YoY to 170MB and the price per MB to fall to RMB0.13 by 2014. This combination of explosive 3G sub growth and rising data consumption should drive stable industry service revenue growth. There is no direct government limitation on flat rate data, there is a clear industry consensus that flat rate is value destructive.
Also, the lack of flat rate data pricing has undercut efforts to stimulate data consumption. The average monthly data consumption for 3G smartphone customers on the China Telecom and China Mobile networks is about 120MB a month, while China Unicom is almost double at 260MB per month. Interesting to note is that China Telecom’s average data consumption on an iPhone is closer to 500MB, although customers on most plans get monthly data allowances above 1GB.
How are the Operators Positioned ?
China Mobile is somewhere in the middle, with an improving 3G-4G network, a much weaker device ecosystem and very limited visibility on earnings growth given the huge earnings drag from aggressive 4G capex. China Mobile recorded 40.9m 3G
net adds in total in the first five months of FY13. China Mobile is facing great headwinds from over the top (OTT) players, such as Tencent’s Weixin threatening the traditional voice and SMS businesses. Expect the decrease in voice and SMS volume to continue in FY13, while in the long run, surging mobile data consumption will compensate for the loss.
China Unicom looks the least attractive, with a weaker network / management, a much weaker balance sheet (FCF negative till 2016e) and greater downside risk from China 4G TD-LTE (Time Division – Long-Term Evolution) policy. CU posted 19.44m 3G net adds in the first five months in 2013, or 31% of the total 3G market share. CU has shifted from targeting high-end subscribers to younger, lower-end subscribers who pay less for data services but consume a lot more data. licenses. Although China Unicom has stated that it is testing the integrated FDD-LTE and TD-LTE network, we think the acquisition of the TD-LTE license could add further pressure on its FY14 and FY15 capex.
China Telecom looks the most attractive with a quality network, the best management / capital structure and good visibility on FY13-14 earnings. The company expects the average data consumption to surge to 171MB per subscriber in FY13 and further increase to around 1GB by the end of 2020. This should drive up mobile handset internet access revenue in FY13 by 93.3%. Chairman Wang Xiaochu discussed the company’s 4G strategy in an industry forum in China last week. He stated the company plans to deploy FDD-LTE to achieve large-scale coverage, while using TD-LTE in urban areas with heavy data traffic. They think the integration of FDD-LTE and TD-LTE is unavoidable.
Despite Diverse Technologies and Challenges, China continues to grow faster than India in adopting 3G.