China Mobile faces most difficult financial phase

China Mobile Ltd, the nation's biggest telecom operator by subscriber numbers, is stepping into its most difficult phase financially because of the next-generation network construction and increasingly severe competition in the domestic market, according to analysts.

China Mobile's shares slumped 3.4 percent to HK$ 82.15 ($10.6) on Tuesday, after the company disappointed the market on Monday with a nearly 9 percent drop in its third-quarter net profit.

Analysts argued that China Mobile might have entered its most financial difficult stage and the situation is about to continue "for a while". "China Mobile is progressing with its 4G network deployment and the company will follow its 190 billion yuan guidance in terms of capital expenditure this year," said Deng Liangsheng, an analyst with China Merchants Securities Co Ltd.

"We forecast China Mobile's capital expenditure will maintain a high level next year and that will affect the company's profitability," Deng said.

In a filing to the Hong Kong stock exchange on Monday, China Mobile said its operating revenue in the first three quarters of 2013 reached 463 billion yuan, representing an increase of 9.4 percent over the same period of last year.

Net profit decreased by 1.9 percent year-on-year during the period - the first net income decline since China Mobile's listing in Hong Kong in 1997. Net profit in the third quarter ended Sept 30 was disappointing, as China Mobile recorded a net income of 28.4 billion yuan in the period, down 8.8 percent year-on-year.

China Mobile said that the 4G license issuance will create favorable conditions for the group's transformation but, on the other hand, will add increased pressure to the group's allocation of resources.

Xi Guohua, chairman of China Mobile Ltd, said earlier this year that China Mobile is going to build the world's biggest 4G wireless network in China, covering more than 500 million people in the country. The company will build or upgrade 200,000 4G base stations in 100 Chinese cities by the year end.

Another major reason for China Mobile's net profit drop was because of rising pressure from over-the-top products in the traditional communications industry. Meanwhile, more intense horizontal competition because of the continued increase in mobile penetration also contributed to the decline, China Mobile said.

WeChat, an instant messaging tool developed by Tencent Holdings Ltd, attracted more than 300 million users in two years. The mobile application draws people from using traditional voice and short-messaging services and, therefore, caused China Mobile's revenue to shrink.

Xiang Ligang, a Beijing-based telecoms expert, pointed out that there were multiple factors creating China Mobile's poor performance. "China Mobile wants to catch up with rivals in the 3G market and it invested a lot in handset subsidies to attract more users, but the move resulted in a financial burden on the company," Xiang said.

Analysts predicted, however, that China Unicom (Hong Kong) Ltd, a smaller telecom carrier in China, will see its third-quarter net profit will rise substantially. China Unicom is set to release its third-quarter report on Oct 25.

China Unicom, which adopted the more mature Wideband Code Division Multiple Access 3G technology, enjoyed a rapid profit growth thanks to its burgeoning 3G business.

China Mobile said the average monthly net additional customers for the first three quarters reached nearly 5 million and, as at Sept 30, the number of customers amounted to 755 million.