China Mobile Ltd. (941), the world’s largest phone company, slumped the most in more than a year in Hong Kong trading after posting profit that missed analyst estimates amid rising network costs.
The stock dropped 3.4 percent to HK$82.15 at the close in Hong Kong trading, the largest decline since Aug. 17, 2012. Net income fell 8.8 percent to 28.4 billion yuan ($4.7 billion) in the third quarter, according to figures derived from nine-month results, missing the 31.1 billion-yuan average of five analyst estimates compiled by Bloomberg.
Chief Executive Officer Li Yue, fighting to stem a decline in the carrier’s share of China’s 1.2 billion wireless users, plans commercial fourth-generation services that will boost capital spending 49 percent this year to more than $31 billion. The company doesn’t have a deal to sell Apple Inc. (AAPL:US)’s iPhone and said it faces “severe difficulties” from instant-messaging apps such as Tencent Holdings Ltd. (700)’s WeChat.
“The company needs to bear a huge 4G expense this year,” Ricky Lai, a Hong Kong-based analyst at Guotai Junan International Holdings Ltd., said in a phone interview. “China Mobile will have a difficult time in the coming quarters.” He recommends investors accumulate the shares.
The shares have lost 9 percent this year, compared with a 2.9 percent gain in the city’s benchmark Hang Seng Index.
Third-quarter sales at Beijing-based China Mobile rose to 159.9 billion yuan, compared with the 152.8 billion-yuan average of seven analyst estimates compiled by Bloomberg.
“China Mobile’s earnings decline has been long overdue and the 3Q miss may signal management’s intention for a cost restructuring,” Sydney Zhang, a Hong Kong-based analyst at Bank of America Merrill Lynch, wrote in a report today. “We think 4G won’t help its earnings until two-three years later and 4G could face strong competition.”
China’s government may issue licenses for commercial 4G services toward the end of this year, the company said in March. The carrier, which built a trial 4G network in 15 cities in 2012, said in February it would expand that to 100 cities this year with 200,000 base stations that can reach a population of 500 million.
While the issuing of 4G licenses will help the company transform and make structural adjustments, it will also place pressure on the allocation of resources, Chairman Xi Guohua said in the statement. China Mobile’s share of wireless users fell to 63 percent at the end of August from 68 percent a year earlier.
The move to 4G may help the company win agreements with handset makers that haven’t supported its homegrown 3G network, including Apple. China Mobile is the only one of the country’s three carriers not offering the iPhone.
China Mobile is close to a deal to sell the iPhone, a person familiar with the matter said last month. The earnings release didn’t mention the handset.
Costs of the 4G expansion previously borne by the state-owned parent are now being shouldered by the listed unit, the carrier said in March.
Xi also cited challenges from “Over The Top” products including instant-messaging apps. WeChat, known as Weixin in Chinese, poses the biggest such threat to China Mobile, Lai said.
“Many users now prefer Weixin rather than traditional voice or texting,” Guotai Junan’s Lai said. “China Mobile is suffering from this substitution.”
China Mobile is projected to report a 0.8 percent drop in full-year net income to 128.18 billion yuan, according to the average of 19 analyst estimates compiled by Bloomberg. The company last reported an annual decline in 1999.
A $993 million write-off on old equipment led the company to report a 30 percent drop in net income in 1999, its first profit decline since listing in October 1997.
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