March 17 2004

China Mobile (Hong Kong) Ltd. (CHL) Thursday posted a 9.1% growth in net profit in 2003,  mainly helped by a full-year contribution from networks it bought the previous year.

However, bigger-than-expected network expansion costs pushed China Mobile's capital expenditure over budget last year for the first time since the company's 1997 listing. The company also said it would raise 2004 spending by 18% from its earlier budget. Its share price closed down 3.4% to HK$23.9.

The listed unit of China's largest mobile operator booked a net profit of 35.56 billion yuan ($1=CNY8.28) for the 12  months ended Dec. 31, compared with CNY32.60 billion a year earlier.

This came in line with analyst expectations of a net profit of HK$35.61 billion for 2003, according to a poll of eight analysts conducted by Dow Jones Newswires.

Revenue climbed 23% to CNY158.60 billion as the company's subscriber numbers for its global system for mobile  communications, or GSM, service rose 20% to 141.6 million.

In 2002, China Mobile bought eight provincial networks from its parent China Mobile Communications Corp., its fourth  such network expansion, and one that extended the company into less wealthy parts of China.

Revenue growth was further supported by fast-growing data services and higher usage volume, which offset falling tariffs due to intense market competition.

"Coming off from SARS, they're still achieving this (9.1% growth). And growth has been recovering in the fourth quarter from the third," said UBS analyst Dylan Tinker. "I think they should be able to perform well (in the coming years)."

In addition to the outbreak of the Severe Acute Respiratory Syndrome last year, China Mobile was locked in  competition with China Unicom Ltd. (CHU), its smaller wireless rival, and China Telecom Corp.'s (CHA) Little Smart  device, a cheap wireless alternative to mobile phones.

The company counter-attacked with discretionary discounts and promotional packages tied to usage volume, and it now  appears to have weathered the competition relatively well.

While its average revenue per minute dropped to CNY0.425 last year from CNY0.553 a year earlier, in line with the industry downtrend, China Mobile's attractive pricing has pushed up the average individual usage to 240 minutes a month from 207 minutes.

Higher Minutes Of Usage Offsets Falling Rev Per Minutes

The strategy shift isn't without cost. Capital expenditure was US$6.0 billion last year, surpassing the company's original estimates of US$5.6 billion and reversing its usual practice of spending below budget. China Mobile further raised the 2004 figure to US$5.8 billion from its previously budgeted US$4.9 billion.

Chairman Wang said the company needed to increase investment on network expansion and upgrades to maintain the service quality as minutes of usage soared.

He said he expects more than half of this year's spending to pay for GSM network expansion, similar to the 52% of a year ago. China Mobile will also double the share of spending on network upgrades for data service efficiency to 18% of the capital expenditure budget from 7% last year.

"Investors don't like spending more on capex," UBS's Tinker said. "But being part of its strategy, they're doing the right thing."

Wang said the company plans to conduct performance trials of third-generation, or 3G, technology, which offers bandwidth wide enough to allow operators to offer video telephony.

If China Mobile is issued a 3G license and begins to build such a network, it will invest first in the wealthy southeast of China, and accordingly tame spending on the existing GSM, a 2G technology.

In its last stage of growing through acquiring from its controlling shareholder, China Mobile plans to buy its parent's last 10 provincial wireless networks by June, Wang said. Talks began in December.

However, after setting aside cash reserved for financing potential acquisitions, China Mobile recommended a final dividend of 20 HK cents a share for 2003, bringing the full-year dividend to 36 HK cents, a payout ratio of 21%.

While this went below some analysts' expectation for a 30% payout, Wang said the company would prefer cash payment to financing the deal with a new share issue, which would dilute earnings per share.