How China Mobile Makes Money (CHL, CHU, CHA, VZ)

In the United States, we seem to understand instinctively that enterprise works best when it stays in private hands. And with a few exceptions, such as passenger rail service, it does. China has different attitudes about state ownership of traditionally private businesses, and today China Mobile (CHL) is the largest mobile phone operator in the world. It’s amazing what a government can do with a) virtually no competition, market nor political and; b) 1.3 billion potential customers. (For related reading, see: Is China Mobile Too Successful to Succeed? )

China Mobile has 807 million subscribers. To put that in perspective, start at the North Pole. Take the entire population of Canada, from the lyrical Arctic Circle to the Great Lake waters. Add the entire population of the United States; every administrative assistant, every sales clerk, every regional marketing representative, every tugboat captain. Keep heading south. Add the entire population of Mexico. Then head to Central America. All of it – Guatemala, Belize, Honduras, El Salvador, Nicaragua, Costa Rica, Panama. Then keep going. To Venezuela, Colombia, Guyana, Suriname, and French Guiana. When you finally get to Brazil, stop. Every single person in that vast area, that majority of the Americas, including the destitute, the indigent, the underage and the ancient, together still are outnumbered by China Mobile’s subscriber base. The largest mobile company in the Americas, Verizon Communications Inc. (VZ), is barely one-eighth the size of China Mobile. (For related reading, see: Time for China's Smartphone Revolution.)

China Mobile is also the largest company that trades on an American stock exchange (the NYSE) yet does business in a foreign currency. Figures are disclosed in renminbi, a.k.a, the yuan, thus technically China Mobile sells to American investors in sponsored Level 3 depositary receipts rather than as standard stock (which makes it easier to avoid currency fluctuations, among other advantages.) The Chinese government allows 30% of the equity in China Mobile to trade, which of course means less volatility in its price. This means a less reliable indication of what the company might really be worth. Tellingly, the stock is trading at about the same levels it did in December of 2014. But even at what might be an artificially stable price, that still means a market capitalization of about $234 billion. (For related reading, see: Yuan vs. RMB: Understanding the Difference.)

Technically, China Mobile doesn’t operate as a monopoly. Also technically, China is a republic of the people. The company does have a 70% market share, however, and the two competitors that round out the domestic market – China Unicom Ltd. (CHU) and China Telecom Corp. Ltd. (CHA) – are also both owned by the state. (For related reading, see: China’s Plan to Overhaul State-owned Companies.)

With such a huge subscriber base, larger than the population of any other country except India, China Mobile doesn’t need to sell the expensive big data plans that First World carriers are famous for. Average revenue per China Mobile user is barely $10 a month in the most recent fiscal year, more in line for a company with a less affluent clientele. (For all the talk about China overtaking the United States as the world’s largest economy, acknowledge the enormous population difference between the two countries and understand that the average American has quadruple the buying power of the average Chinese.)

Voice usage on China Mobile’s networks has increased more or less commensurate with the company’s growing customer base. China Mobile totaled 4.3 trillion minutes of voice use in 2014. That’s actually a decrease from 2013, and if you’re in the West and have examined your own mobile usage over the last few years, you probably know why. (For related reading, see: Is Now the Time for Chinese Stocks? )

While voice usage might be stagnating, China Mobile’s mobile data traffic is doubling every year – using the largest convenient units, it’s gone from barely a quarter of an Exabyte to a half to more than one over the last three years. The most recent figure represents about a day’s worth of worldwide internet usage. The corresponding increase in expenses to get to that level is minimal, as we’ll see. (For more, see: Will Apple Crack China's Mobile Payments Market?)

Unlike its North American and European counterparts, China Mobile garners a larger share of its revenue from physical products than from services. Service revenue topped out at $90 billion last year. Which is 10 times as much as the company takes in from its physical products, but the latter category has, again, almost doubled in each of the last two years. Product sales have become, in the understated tone of China Mobile’s own accountants, “more than incidental.” Products, in this instance, refers to TD-LTE dual-mode terminal devices, sold primarily to business clients, and almost certainly heading past $10 billion annually.

Data services is becoming an increasingly more important part of China Mobile’s business. Just over the past year, it’s gone from representing 35% of company revenue to 44%. Almost all of the increase comes under the category of mobile data traffic, which increased from $16.2 billion to $23.2 billion in that time. Music, video, reading, game, and animation applications use more data than the SMS and MMS messages that previously served as China Mobile’s primary data business center. (For related reading, see: China Mobile and Its Telecom Peers Swap CEOs.)

As trade has liberalized and the planet has figuratively shrunk, data services have become more and more important. China Mobile claims a coverage area that’s the envy of most any enterprise around the world, claiming all but 100% penetration over all of China’s population. With an aggressive strategic plan in place, and the full backing of a government sitting on piles of cash (and AAA-rated foreign debt), it’s hard to see how China Mobile will do anything but get bigger still. (For related reading, see: Is it Time to Bet on China Again?)