China Sets 100 M 3G Customer Goal

People’s Republic of China – the biggest telecom market in the world by subscriber base has set an ambitious goal for the forthcoming year. Additionally, the East Asian country expects 3G subscribers and broadband Internet to collectively propel growth in 2013. According to China’s Ministry of Industry and Information Technology (MIIT), the country expects to add 100 million 3G subscribers with the number of broadband Internet users to increase by 25 million in the coming year.

According to International Data Corporation (IDC), the smartphone shipment in China has hit a new record by adding more than 60 million customers in the third quarter of 2012, translating into a sequential growth of 38%. Based on this increased popularity of smartphone, 3G subscription till November 2012 has recorded an annualized growth of 88%.

On the revenue front, the telecommunication industry in China expects an 8% annual increase, which is even better than the third quarter GDP growth rate of 7.4%. According to MIIT, the reduction of service fees, improvement of service quality and allowing more private capital to enter the market have contributed to the impressive growth.

Moreover, a deeper analysis throws light on the fact that at the end of November, China had 1.1 billion mobile phone users of which only 220 million were 3G subscribers. So, this provides a significant opportunity for the Chinese carriers to tap this under penetrated 3G market.

Recently, China Mobile Limited (CHL - Snapshot Report), the largest wireless carrier in the world by subscriber base, came up with its 2013 target of selling 100 million mobile phones in 2013. A potential deal with the world’s second largest smartphone manufacturer – Apple Inc. (AAPL - Analyst Report) to sell iPhone5 was mainly attributable for this raised guidance.

China Mobile has been in talks with Apple for quite some time in order to develop a TD-SCDMA iPhone, although nothing has been finalized yet. Additionally, the company is planning to offer Nokia Corporation’s (NOK - Analyst Report) Lumia 920T at a very low cost, which is expected to increase its 3G customer base even further.

Nevertheless, China Mobile, which covers more than half of the Chinese mobile market, has so far been successful in penetrating only 11% of its huge subscriber base. Two of its closest rivals, China Unicom Limited (CHU - Analyst Report) and China Telecom Corp. (CHA - Snapshot Report), which offer iPhone have a far better 3G customer concentration than China Mobile. In November 2012, China Telecom and China Unicom registered 5% and 4.6% sequential growth, respectively.

We believe that with a billion plus population, a steady per capita income and a higher smartphone adaptation rate, the target to achieve 100 million 3G customers is quite realistic. Additionally, with a mere 20% 3G penetration rate along with a probable chance of China Mobile and Apple Inc. joining hands, the target looks quite reasonable.

China Mobile currently has a Zacks #2 Rank, implying a short-term Buy rating.