Fitch Ratings-Hong Kong/Sydney-16 August 2013: Fitch Ratings says it expects China Mobile Limited's (CML, A+/Stable) revenue growth and profitability will be affected by higher competition from other telecoms companies and over-the-top (OTT) operators. While we expect the growth in 3G services seen in H113 to continue, operating cash flow will be broadly stable as newer services are generally less profitable than legacy operations. Nevertheless, EBITDA, cash generated and liquidity will remain strong.

CML's 3G business will continue to gain traction, with 3G network utilization continuing to improve. Fitch estimates that CML's 3G revenue surged 96% yoy to CNY52bn in H113, offsetting the decline in voice revenue and short message service (SMS) revenue due to heightened competition and data for voice substitution.

However, Fitch expects CML to continue to gradually lose subscriber and service revenue market shares over the next two to three years. In addition, Fitch forecasts that CML's revenue growth will slow, and profitability will remain under pressure due to intensifying OTT substitution. In H113, CML still received 69% of its revenue from traditional voice and SMS services, which tend to command higher margins but have higher substitution risk.

Over the next two to three years, we expect CML's EBITDA, at best, to remain stable despite mid-single digit per annum revenue growth, as margins will continue to decline. Excluding the effect of a reclassification of handset sales, CML's EBITDA margin was 43.4% in H113, compared to 46.2% in H112. Nevertheless margins remain strong when compared to global peers.

Fitch believes an accelerated licensing and increased government support of CML's 4G time division long-term evolution (TD-LTE) technology will help reduce CML's disadvantages in mobile data. CML's 3G business continues to be hindered by the inferiority of its time division synchronous code multiple access (TD-SCDMA) technology compared to competitors' global 3G technologies, and the company has been losing some high- to middle-end mobile subscribers. On 8 August 2013, China's State Council issued new guidelines to fast-track information technology related consumption, including targeting 4G licensing by the end of 2013 and the promotion of TD-LTE.