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Edited Transcript of 941.HK earnings conference call or presentation 23-Mar-17 6:00am GMT

Thomson Reuters StreetEvents

Annual 2016 China Mobile Ltd Earnings Presentation (Chinese, English)

Hong Kong Mar 23, 2017 (Thomson StreetEvents) -- Edited Transcript of China Mobile Ltd earnings conference call or presentation Thursday, March 23, 2017 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Shang Bing

China Mobile Limited - Executive Director and Chairman

* Li Yue

China Mobile Limited - Executive Director and CEO

* Dong Xin

China Mobile Limited - Executive Director, VP and CFO

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Presentation

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Unidentified Company Representative [1]

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Good afternoon ladies and gentlemen. Welcome to China Mobile Limited's 2016 annual results announcement briefing. In today's briefing the Company management will first present the overall results and then take questions from the audience.

First of all, let me introduce the senior management attending today's briefing. Mr. Shang Bing, Executive Director and Chairman; Mr. Li Yue, Executive Director and CEO; Mr. Liu Aili, Executive Director and Vice President; Mr. Sha Yuejia, Executive Director and Vice President; Mr. Dong Xin, Executive Director, Vice President and CFO.

Now I would like to invite Chairman Shang to present the annual results for 2016 and the outlook for 2017.

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Shang Bing, China Mobile Limited - Executive Director and Chairman [2]

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Good afternoon, ladies and gentlemen. Welcome to China Mobile's 2016 annual results announcement briefing. Today's presentation is divided into three parts. I will go through the overall performance for 2016 and the outlook for 2017. Then Mr. Li will talk about the operating performance. Finally, Mr. Dong will walk you through the financial results.

Now I will present the overall performance for 2016 and the outlook for 2017. In 2016, with a strong market worsening, China Mobile actively grasped the latest industry trends focusing on innovation and further enhancement.

We promoted the integrated environment of the four growth engines. Namely, the mobile market, the household market, the corporate customer market and the emerging business and have achieved remarkable results.

In terms of operating results, the Company record a five-year high service revenue growth and maintained industry leading profitability in 2016.

Data traffic business continued to grow rapidly and its revenue has become the biggest revenue source for the first time in our history, surpassing the combined revenue of voice, SMS and MMS.

In terms of operating performance, we have maintained a comprehensive leadership in 4G, achieved rapid growth of the wireline broadband business. And the revenue from corporate customer businesses continues to go up. At the same time, we have made concrete steps to develop emerging business, including the digital services and have achieved favorable results.

Last but not least we attach great importance to the needs of shareholders and increased dividend payout ratio for 2016 to 46%.

For your reference, here are the key performance indicators for 2016.

In 2016, although the Company has taken the initiative to mitigate arrears associated with the cancellation of domestic long distance and roaming tariffs, its revenue and profits still achieved encouraging growth. Service revenue has increased by 6.7% with a growth rate reaching a record high in five years and ranking the first in the industry.

With a revenue market share of 52%, we continued to consolidate our market leadership. Benefited from favorable revenue growth and effective cost control, we continue to lead industry in terms of profitability.

Net profit reached RMB108.7 billion excluding the one-off gain on the transfer of tower assets in 2015. Net profit increased by 10.5% year on year.

The Company attaches great importance to addressing shareholders' expectations. We hope to create better returns for our shareholders and share with them the fruits of our success while also securing the Company's development and show the value in the longer term.

The Board recommends raising 2016 full-year dividend payout ratio to 46% from 43% originally planned. Meaning that the dividend payment for the full 2016 will be HKD2.732 per share.

Taking into account the Company's financial position, it's ability to generate cash flow and its capital demands for future development, we will maintain a stable dividend payout ratio for 2017. At the same time striving to attain a stable to rising dividend payout ratio to create higher shareholder value.

Actual CapEx for 2016 was RMB187.3 billion which was nicely higher than previously planned. This is mainly because we have increased investments in 4G and wireline broadband for business development.

CapEx for 2017 is budgeted at RMB176 billion, a decrease of 6% from 2016. CapEx will be mainly used for establishing a premium network to promote business transformation, thus laying solid ground for sustainable development,

We have considered the following. First, although we enjoy 4G coverage leadership, with the rapid increases in customers and data traffic we see a need to strengthen our coverage under certain scenarios which are important sources of data traffic revenue. This year our 4G investments will be mainly spent on ensuring leading customer experience.

Second, as a latecomer in the household market we need to build up our network competitive edge, continuously lifting value by enhancing product quality and variety.

Third, due to the demand for higher traffic and bandwidth driven by the four growth engines we need to reserve adequate infrastructure resources in advance and enhance network carriage capability to meet the demand from rapid growth of data traffic. This also supports future development of 5G, Internet of Things and emerging business.

At the same time, we need to prepare for further network restructuring and transformation as the telecommunications networks are evolving to be software-based, cloud-based and intelligence-based.

The Company is going through a period where opportunities and challenges co-exist. On one hand, in response to China's ambition to become a cyber power there is a need for strengthening the development of digital economy. The network space has evolved from people to people connections to Internet of Everything.

There are now more new technologies and applications apart from the (inaudible) and invasive ecosystem. All this bring us ample growth opportunities.

On the other hand, we face a rapidly changing competitive landscape. The focus of industry competition has been shifting from network products and services to a new and higher plan that is more concerned with the path and the ecosystem.

Competitions in the 4G market and cost discipline of convergence have intensified. Data traffic revenue growth has shown signs of slowing down. Emerging business are still picking up pace. Not mentioning the challenges such as substitution network services by bypassing, restructuring of industry chain and diversion of user values.

Under this environment, we need to focus on current strategies and at the same time keep a close eye on market trends and fastly adjust our long-term development strategy so as to capture growth opportunities. To this end, we did release the Big Connectivity strategy last year as such key the direction of transformation.

This year is a critical year to implement the strategy. We will devote efforts to make full-fledged plans to challenge the Big Market, get prepared for the evolution of the Big Network, keep fostering our Big Capabilities and strive to promote Big Coordination so as to ensure the strategy is implemented effectively.

We have the following targets for our operating performance in 2017. Overall, we strive to achieve revenue growth above the industry average and to maintain an industry leading profitability. We continue to consolidate our 4G leading advantages, realizing a net increase of 100 million 4G customers and to maintain stable to rising mobile ARPU.

We plan to further develop wireline broadband business with new focus on both quantity and quality. We aim to acquire a net increase of 20 million of customers and take steps to continuously enhance customer value.

At the same time, we will also expedite the development of Internet of Things. Connections are expected to reach a net growth of 100 million.

This year marks the twentieth anniversary of China Mobile's public listing. In just two decades the Company's revenue has grown by 68 times, profit increased by 24 times and its market cap expanded by 13.5 times.

Currently, China Mobile boasts the world's largest network and customer base, industry leading profitability and market cap. All those factors combine to make China Mobile world-class telecom operator.

I would now like to take this opportunity to express my heartfelt gratitude to our customers, shareholders, staff and the wider community for their support and care. We will continue to work hard and look forward to delivering even greater value and returns for every one of you.

Now I would like to invite Mr. Li to go through our operating performance.

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Li Yue, China Mobile Limited - Executive Director and CEO [3]

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Thank you Chairman san. I am delighted to present the Company's operating performance in 2016. In 2016, we continued to promote the integrated development of the four growth engines and proactively grow the mobile market, household market, corporate customer market and the emerging business. Each of these managed to achieve relatively rapid and sizeable (inaudible).

For 4G, we firmly and timely grasped the ample growth opportunities and continued to devote great efforts to enhance our network quality and expand our customer base. We added [0.4] million of 4G base stations bringing the total to 1.51 million. Indoor coverage area increased by 58% and we announced full 4G coverage at high speed railways, subways and scenic spots.

Average download speed on urban roads improved to 40 megabits. We are fully devoted to developing VoLTE and launched high quality VoLTE in 313 cities. Buoyed by high quality network, 4G customers recorded rapid growth with a net increase of 223 million to 535 million in total and the penetration rate has increased to 63%.

The value of the 4G customers is significantly higher than that of the 2G and 3G customers. 4G ARPU was RMB74.4 and DOU was 1 gigabyte which were 2 times and 7.5 times of those of the 2G and 3G customers respectively.

The Company's mobile customer base grew steadily to 849 million. Meanwhile, with rapid 4G migration, 4G has become our mainstream mobile customers. Mobile service revenue grew by 4.7% to RMB578.2 billion. Mobile ARPU stabilized and rose to RMB57.5.

With the rapid development of 4G, data traffic and revenue continued to grow rapidly, hence the data traffic increased by 127.7%.

Revenue increased by 44.8%, accounted for 45.4% of our service revenue.

Wireless data traffic became the biggest revenue source for the first time in the history, surpassing the combined revenue of voice, SMS and MMS. We have deepened data traffic operations, innovated data portals and explored the content developments. And, as a result, the demand for data traffic was effectively enhanced.

Mobile customers DOU doubled. Last year the Company continued to implement the upgrade and tariff reduction. Handset tariff decreased by 36%. Through rationally manage data tariff, we have preserved data value and the rate of reduction data tariff has slowed down.

In 2016, affected by OTT substitution, the Company's traditional business continued to decline. Voice service revenue decreased by 19.8% and SMS and MMS revenue decreased by 8.6%.

Through strategic visioning on regulatory direction. And in view of voice occupied a relatively large proportion of our total revenue, we proactively took measures to mitigate the risks associated with the cancellation of domestic long distance and roaming tariff.

We have removed standalone non flat rate, domestic long distance and roaming package from our current portfolio and we have promoted the sales of flat rate packages with proportion rising to 63.6% effectively reducing the new impact of the new high speed upgrade and tariff reduction.

For wireline broadband business, we continue to expedite the business quality and market competitiveness by adopting a high-end market approach. We witnessed that growth of wireline broadband business customer base reached 77.62 million and occupied the second place in the industry buoyed by our focused efforts to promote mid to high-end bandwidth products.

Proportion of customers subscribing 20 meg or above products has reached 76.9%. Customer value gradually increased with ARPU rising to RMB32.1.

In the meantime, we have devised plans to proactively tap into the family digital services market. Our home digital product Mobaihe customers has exceeded 22.8 million. Wireline broadband ARPU, that includes home digital services, reached RMB33.8.

For the corporate customers' market, we put a strong focus on key industry sectors and key products and scaled up our market development efforts. In 2016, corporate telecommunication and informatization services revenue grew by 29% attaining around one-third of the market.

We have been expanding great efforts to developing the emerging business. We have established the world's largest dedicated core network for Internet of Things with over 100 million connections.

Our mobile payment service and wallet recorded total transaction amount exceeding RMB1 trillion. At the same time last year we have introduced voice service systems and our Big Data applications are now augmented with exterior service capabilities such as public security and credit scoring. Further (inaudible) within our services.

Quality is the [lifeline] for any telecommunications company with a clear determination to come and assess its size on crafting a premium network and continuously expanding its Big Network leading advantage. In 2017, our CapEx will mainly be used in the following areas.

Building additional 0.26 million new 4G base stations bringing the total number to 1.77 million. We strive to ensure coverage in high speed/high data traffic/ limited uplink traffic scenarios and high-rise buildings.

For wireline broadband business, we will continue with our strategy of targeted development, raising existing resource utilization rate and establishing a high quality full-fiber broadband network.

To meet the demand for Big Traffic and high bandwidth as a result of 4G and wireline broadband developments and to cope with future development of 5G and Internet of Things business, we will continue to promote basic transmission network construction, optimize network structure and reserve resources in advance.

Meanwhile, we will also accelerate the construction of new IT infrastructure.

The Company plays an active role in fulfilling its corporate social responsibility and has made remarkable achievements in eliminating digital divide, protecting customer information security and privacy, energy conservation emissions reductions and supporting charitable activities.

In 2017, we will follow through the Big Connectivity strategy with the goal of enhancing quality and efficiency. We will further promote reform and innovation, continuously enhance core competencies. This will invent new growth engines, at the same time promoting transformation, sustainable development.

Now I would like to invite Mr. Dong to talk about the financial results.

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Dong Xin, China Mobile Limited - Executive Director, VP and CFO [4]

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Thank you Mr. Li. Now I will go through the financial results for 2016.

In 2016, following the rapid development of 4G and wireline broadband business, the Company achieved an encouraging growth in revenue. Service revenue reached RMB623.4 billion, increased by 6.7%. Growth rate in service revenue recorded a five-year high, surpassed the industry average.

Revenue growth from sales of products decreased nicely mainly due to the Company actively promoting handset sales through public channels and provide a variety of terminals with diversified functionality to the customers.

With favorable revenue growth, the Company continued to improve cost control. Operational efficiency has been improved significantly and profits from operations increased by 14.7%.

For the investment of associates SPD Bank, [Avatech] and China Tower also brought positive contributions to our return. In 2016, share of profits of these investments reached RMB8.6 billion, up by 6.7%. Therefore, the Company's net profit reached RMB108.7 billion, grew by 0.2%. Excluding one-off gain on the transfer of tower assets in 2015, net profit increased by 10.5%.

The Company continued to strengthen cost control and improve operational efficiency, thus achieving significant result. The percentage of operating expenses over operating revenue was 83.3% which decreased for the first time since 2008 in respect of cost structure.

Leased lines and network assets expense was RMB39.1 billion up by 89.1%, mainly due to the leasing fee of RMB28.1 billion to China Tower.

Depreciation increased by 0.9%. The Company's investment has maintained at high level in recent years resulting in an expansion of asset scale which drove the rising of depreciation. On the other hand, the change of tower operation model and the transfer of existing tower assets helped to decrease depreciation.

The Company actively promoted the transformation of its marketing model by enhancing precision marketing, therefore further boosting its marketing resources efficiency and the selling expenses decreased 3.9%.

Since the Company encouraged handset sales in public channel, cost of products sold declined and handset subsidy decreased by RMB1 billion.

The Company further focuses on the efficiency of utilization of resources through continuous promotion of healthy promotion and refined management. Cost per unit was further improved.

Operating expenses accounted for a decrease of operating revenue for network operation and maintenance costs so therefore refined management increased continuously and part of the expense has been accounted in tower leasing fee. Thus, the average maintenance expenses per base station and the average power and utilities expenses per base station decreased by 14.2% and 6.6% respectively.

For customer development costs, advertising, promotion and exhibition expenses per net additional 4G customer and handset subsidy per net additional 4G customer decreased by 22.1% and 9.2% respectively. While impairment loss of doubtful accounts only accounted for 0.6% of the service revenue.

In terms of administrative costs, the Company implemented a strict control on the administration and entertainment expenses. The administration expenses growth was achieved and as a proportion to operating revenue, it accounted to only 0.5%.

In 2016 with healthy revenue growth and effective cost control EBITDA increased by 6.9%. The growth rate was higher than net profit growth rate. EBITDA margin reached 36.2%, increased by 0.3 percentage points. Due to the continuing development in 4G and reducing CapEx year by year, the Company maintained a steady profit growth.

Cash flow continued to be strong. Free cash flow increased by 68.1% to RMB66.4 billion.

Our capital structure maintains solid, obtained the recognition from credit rating agencies and built a solid foundation to respond to the changes of the market competition and future development.

The State has promulgated a new round of speed upgrade and tariff reduction. To actively respond to the speed upgrade requirement, the Company will continuously provide industry leading network quality experience to customers.

We will also thoroughly implement measures on tariff reduction to seize favorable opportunities to accelerate transformation in traditional business and to focus on long-term development.

According to the estimates obtained from the static calculation based on the Company's current business structure, the free tariff reduction measures are expected to result in a decrease of each of the operating revenue and operating profits in 2017 as follows.

First, by around RMB4 billion for one quarter. Due to cancellation of domestic long distance and roaming tariff.

Second, by RMB3 billion due to the reductions of dedicated Internet access tariff for SMEs and international long distance core tariff.

The Company will strive to reduce the impacts by stepping up efforts to business development achieving a higher turnover despite a lower profit margin in order to maintain favorable performance.

This is the end of our presentation.

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Editor [5]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.