Statistics from Ministry of Industry and Information Industry (MIIT) indicated the telecom industry’s revenue has showed initial signs of recovery in 1Q09 (+1.7% yoy) and continued to improve in Apr 09 (+2.8% yoy). Among the different services segments, contribution from mobile services as a percentage to total industry revenue increased steadily from 43.7% in Jan 04 to 60.4% in Apr 09 as the number of mobile subscribers keeps rising while fixed-line users decline.
For the past few months, telecom operators have underperformed the market due to the slowdown in overall usage growth and margin declined as China Telecom enters the mobile services market. But telecom usage, mobile services in particular, should resume growth over the next few quarters given the expected improvement in business activities, economic growth and domestic consumption.
With a 73.6% share of the mobile subscribers market and a monthly user net addition share of over 60% in 4M09, China Mobile (CMHK) will be the major beneficiary when mobile service resumes growth. Our conservative forecast may underestimate the growth potential if it sustains through the rest of the year.
We maintain our subscriber growth and usage assumptions, but we may raise them if the company posts better 2Q09 usage numbers.
CMHK’s share price is down 6.8% ytd due to poor 1Q09 results and investors' concern that intensified competition will hurt the company in the longer term. Year-to-date, MSCI China Consumer Staples Index has risen 23.1% and Hang Sang Index (HSI) is up 21.0%. With the one-year relative performance between CMHK and the HSI getting close to the lowest, China Mobile may play catch-up soon as mobile usage recovers. Reiterate BUY with HK$85.00 target price based on 13x FY09F PE (or an 11.8% discount to our HK$96.40 DCF fair value based on 11.0% WACC and 2.0% terminal growth).
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