TEXT-S&P summary: China Mobile Ltd.
(The following statement was released by the rating agency)
Nov 15 -
Summary analysis -- China Mobile Ltd. ----------------------------- 15-Nov-2012
CREDIT RATING: AA-/Stable/-- Country: China
Primary SIC: Communications
Mult. CUSIP6: 16941M
Mult. CUSIP6: 169428
Credit Rating History:
Local currency Foreign currency
16-Dec-2010 AA-/-- AA-/--
31-Jul-2008 A+/-- A+/--
The rating on China Mobile Ltd. reflects the company's strong stand-alone credit profile (SACP) of 'aa-'. The rating also incorporates our opinion that there is a "very high" likelihood that the government of China (AA-/Stable/A-1+; cnAAA/cnA-1+) will provide sufficient and timely extraordinary support to China Mobile in the event of financial distress.
China Mobile's SACP reflects the company's "excellent" business risk profile and "minimal" financial risk profile. China Mobile's leading position in terms of sales and market share in the country's mobile telecommunications industry and strong cash flows due to its large subscriber base support the company's business risk profile. Further, China Mobile's existing and new businesses have good growth potential, given China's relatively low mobile penetration rate of about 80%. Increasing competition in China's mobile communications industry, however, tempers these strengths.
In accordance with our criteria for government-related entities, our view of a "very high" likelihood of extraordinary government support is based on our assessment of the following China Mobile characteristics:
-- "Very important" role to the government due to the strategic importance of the telecom industry in China. The company also commands a significant market share (65%) in terms of subscribers in the local mobile telephony industry. It is one of three government-owned telecom operators in China.
-- "Very strong" link to the government, which indirectly owns 74% of China Mobile through a holding in the latter's parent China Mobile Communications Corp. (not rated). The government's policy stance is to maintain its controlling stake in China Mobile. In our view, the government can exert a strong influence on the company's strategy through the appointment of board members and senior management.
In our view, competition in China's telecom industry has increased since the industry's restructuring in 2008. Three integrated operators now dominate China's telecom industry: China Mobile, China Unicom Ltd. (not rated), and China Telecom Co. Ltd. (not rated). All three operators have nationwide resources and full service capabilities, leading to intense competition. China Mobile's average revenue per user (ARPU) declined to Chinese renminbi (RMB) 67 in the first half of 2012, compared with RMB71 in 2011 and RMB73 in 2010, largely due to the mounting competition. Nevertheless, the company's subscriber base rose by about 11% year over year to 683 million as of June 30, 2012. Although we expect the subscriber growth rate to slow down gradually, we believe China Mobile will maintain its dominant position, given its extensive network coverage and strong network quality.
In our opinion, China Mobile's solid subscriber base and continually growing total voice usage volume have helped the company generate strong cash flows and earnings, which more than offset the decline in the company's ARPU. In addition, China Mobile's strategy to increase its value-added services such as mobile Internet access has helped revenue growth. During the first half of 2012, data services revenue contributed 28.5% to total operating revenue, compared with 25.9% a year ago.
China Mobile's strong cash-generation and low debt give it considerable financial flexibility to compete with its domestic peers. The company has a large amount of capital available to expand its current time division synchronous code division multiple access (TD-SCDMA, 3G) network and upgrade to its time division long-term evolution (TD-LTE, 4G) network. We believe this strong financial flexibility, together with the government's support for the home-grown TD-based technology, should help mitigate the risks that may stem from the government's attempt to encourage competition in China's mobile telephony industry.
We expect China Mobile's financial performance to remain solid over the next two to three years. The company's financial results in the first half of 2012 were strong, in our view. It sustained solid profitability, with an EBITDA margin of about 46%, despite stiff competition and higher marketing expenses on 3G services. In our base-case projection, we forecast China Mobile to maintain robust financial leverage and cash flow protection measures, with a debt-to-EBITDA ratio of about 0.2x and debt-to-capital ratio of about 7% in 2012 and 2013.
In our view, China Mobile has "exceptional" liquidity, as our criteria define that term. Our assessment of the company's liquidity profile incorporates the following expectations and assumptions:
-- We expect the company's sources of liquidity to exceed its uses by about 3.0x over the next 12 months.
-- We expect net sources to remain positive, even if EBITDA declines more than 50%.
-- As of June 30, 2012, the company's cash and equivalents were RMB393 billion, more than sufficient to cover its annual capital investment of about RMB130 billion and total debt of RMB29 billion.
The stable outlook on China Mobile reflects our expectation that the company will maintain its robust market position and minimal financial risk profile. It is also based on our expectation that the very high likelihood of extraordinary government support will remain unchanged.
We may raise the rating on China Mobile if we raise the sovereign credit rating on China. On the other hand, we could lower the rating on China Mobile if: (1) the company's SACP weakens substantially to 'a-' or lower, which we don't believe is likely; or (2) we lower the sovereign rating on China.