China Mobile Surges on Plan to Cut $2 Billion in Phone Subsidies

Aug 15, 2014 12:47 am ET

Aug. 15 (Bloomberg) -- China Mobile Ltd. rose to the highest in six years after saying it will cut $2 billion from the subsidies that help consumers in the world’s largest market pay for smartphones from Apple Inc. and Samsung Electronics Co.

The carrier’s shares surged 5.3 percent to HK$93 in Hong Kong trading as of the midday break, reaching its highest intraday level since Aug. 27, 2008.

China Mobile’s 38 percent reduction in subsidies may accelerate market-share gains for domestic manufacturers including Xiaomi Corp. and Lenovo Group Ltd., both of which outsell Apple in China with feature-packed phones at cheaper prices. The cuts come after government regulators were said to tell the nation’s three carriers to lower marketing expenses, changing a practice that spurred sales for high-end devices.

“With fewer subsidies, consumers may opt for cheaper devices made by local producers in favor of those sold by Apple and Samsung,” Bloomberg Intelligence analysts John Butler and Matthew Kanterman said in a report yesterday.

The costs of subsidies for iPhone and Galaxy handsets eroded the carrier’s profitability. China Mobile yesterday reported its fourth-straight drop in quarterly net income.

China Mobile will spend 21 billion yuan ($3.4 billion) to offset the costs of phones for customers this year, compared with the 34 billion yuan the carrier planned to spend, Chief Financial Officer Xue Taohai said in Hong Kong yesterday. The company already spent 15.3 billion yuan in the first half.

Government Regulators

The reduction was announced after the State-owned Assets Supervision and Administration Commission told China’s three carriers to cut costs because they overspent on subsidies and advertising for devices such as iPhone, people familiar with the matter said last month.

Lowering subsidies should be positive for profit, Xue told the conference, without supplying details.

“Our concern is how will consumers react to this drastic change in marketing style,” Danny Chu, a Hong Kong-based analyst at Macquarie Research, wrote in a report after yesterday’s announcement. “If China Mobile decides to lower handset subsidy in the near term, we may see higher churn rate.”

China’s carriers were told to cut spending on subsidies and advertising by a combined 40 billion yuan, or about $6.4 billion, in three years, the people said.

Unicom, Telecom

China Unicom (Hong Kong) Ltd., the nation’s second-largest carrier, will reduce selling and marketing expense as a percentage of revenue in the second half of this year, President Lu Yimin said on an Aug. 7 earnings conference call.

“We’ll continue to focus on the quality of development and also the cost effectiveness,” Lu said. “We will control our overall handset subsidy toward the high-end models in the second half, and I don’t think those controls will hurt our overall development quality.”

China Telecom Corp., the third-largest carrier, won’t report first-half financial results until Aug. 27. The company will supply a forecast for full-year phone subsidies at that point, Jacky Yung, a spokesman, said in an e-mail.

Even as China Mobile cuts spending, Apple “must” still make it one of the first carriers to offer the next iPhone, China Mobile Chairman Xi Guohua said yesterday.

“It’s a must for us to be in the first batch,” Xi said in Hong Kong. “China Mobile has a huge user base. Apple also greatly values China Mobile’s market in China.”

IPhone Deal

The carrier in December agreed to offer the iPhone after six years of negotiations with Cupertino, California-based Apple. Sales of the device started in January at China Mobile shops, and Apple said iPhone sales rose 48 percent in the country in the quarter ended June 28.

“We expect high-end global brands, for example Apple and Samsung, to lose, and local mid/low-end brands with close partnership with operators to benefit,” Alex Ng, a Hong Kong- based analyst with China Merchants Securities, said in an e- mail.

Chinese companies that will benefit from sales of lower cost devices include Xiaomi, Lenovo, Huawei Technologies Co. and Coolpad Group Ltd., Ng said. Xiaomi became the largest smartphone vendor in the country in the second quarter, passing Samsung, according to researcher Canalys.

China Mobile posted profit that beat analyst estimates as the expansion of its fourth-generation network and sales of the iPhone helped it add more subscribers than competitors.

Biggest Network

Net income was 32.5 billion yuan in the second quarter, according to figures derived from six-month results reported yesterday. That represents a 7.8 percent decrease from the year before.

China Mobile is building the world’s biggest 4G network to drive a shift to faster services for downloading videos and games as its text messaging business loses ground to free applications including WeChat. The company had 13.9 million 4G customers at the end of June, more than quadruple that of second-ranked China Unicom, helping drive a 52 percent surge in data traffic revenue.

“This is due to high value 3G customers at Unicom migrating back to China Mobile for 4G services,” Chris Lane, an analyst at Sanford C. Bernstein & Co., said by e-mail after results. “They are now on a run rate to exceed their internal 50 million forecast 4G subscribers for the year.”

China Mobile’s 4G network built 410,000 base stations for a service covering more than 300 cities, the Beijing-based company said.

Sales in the quarter rose less than 1 percent to 169.9 billion yuan. China Mobile had 790.6 million subscribers at the end of June, the company said last month.