Fitch Affirms China Mobile's Ratings at A+

Fitch Ratings has today affirmed China Mobile's (CML) Long-term foreign currency Issuer Default Rating (IDR) at 'A+'. Meanwhile the agency has assigned CML an 'A+' Long-term local currency IDR. The Outlook is Stable.

The ratings reflect CML's leading market position in China's telecom market. Being the largest mobile operator globally with 436 million subscribers as at end-September 2008, CML continues to acquire more than 7 million new subscribers per month. During the first three quarters of 2008, CML' subscriber base increased by an impressive 24.7% year-over-year, facilitated by its high-quality and extensive network which now covers around 97% of the Chinese population. Among CML's new subscriber additions, nearly 50% came from rural areas, where CML's network coverage is well-advanced compared to its competitors, although the recently implemented base station infrastructure sharing program is likely to help China Telecom and China Unicom. With mobile penetration in China still relatively low at 47.3%, the agency expects that CML's competitive strengths will enable it to continue growing strongly over the next three years.

CML's ratings also reflect its competitive edge in value-added services, which accounted for 27% of its total revenue in H108, a higher percentage than its peers both in China and developed markets where 3G services have already been deployed. Its advantage in mobile content and applications will help CML better prepare for its 3G service offering, although the company is likely to receive a 3G license based on the TD-SCDMA technology.

The ratings also reflect the likelihood of increased competition in the telecom sector after 2008's government-led industry restructuring where the three major telecom operators evolved into full-services providers. There is a risk that greater competition could drive down CML's (and its competitors') EBITDAR margins, which has been consistently over 55%. However, the agency does not expect CML's EBITDAR margins to decline below 50% in the short-to-medium term, given CML's leading market position and extensive network coverage.

The expected TD-SCDMA licensing is currently a constraining factor on CML's ratings as the agency anticipates a number of disadvantages compared to the more established and widely accepted W-CDMA 3G technology. However the agency does not expect this to change CML's business profile significantly in light of its 70%-plus market share in 2G/2.5G, its large subscriber base, its superior network and brand image, and its dominant position in the medium-high-end segment in China. Although CML's ARPU declined to CNY84 in H108 from around CNY90 in 2006 and 2007, it still remains 93% higher than CULHK's CNY43.6.

CML's ratings are further constrained by its relative weakness in the fixed-line/broadband segment, which is likely to become a more important factor going forward considering that its two major competitors are now full-services providers. In consequence of CML's weak mobile 3G technology, at least from a global reputational viewpoint, and in the face of its competitors' bundled offerings of fixed-line, broadband, mobile and potentially some IPTV services as well, Fitch expects that its market share of high-end customers will erode gradually. However, notwithstanding the TD-SCDMA licensing, the agency expects CML will be able to maintain most of its current competitive advantages.

Fitch notes that likely asymmetric regulations against CML could also negatively impact the company's ratings. Nevertheless the agency believes that tight adverse regulations are unlikely, at least within the short term, given that the mobile penetration was still only 47.3% in September 2008, coupled with the fact that the government has a very strong commitment to ensuring the success of the TD-SCDMA technology. Nevertheless, more restrictive regulations than Fitch currently expects could present downward pressure on CML's ratings.

In the past 12-18 months, CML's cash position continued to accumulate and reached CNY212bn at the end of H108, while its outstanding total adjusted debt was only CNY70bn. Strong revenue growth, a stable EBITDAR margin and positive FCF generation are the main driving factors in this regard, although its capex and dividends have increased steadily. Fitch expects that CML's strong financial profile will support the company through the uncertainties ahead, including the risk of higher competition.

CML is listed on the Hong Kong Stock Exchange and is 74.3% owned by China Mobile Communications Corporation, which is in turn 100%-owned by the Chinese government.

Posted to the site on 10th December 2008