China Mobile's (CHL) Ratings Affirmed by Moody's Following FY14 Results

Moody's Investors Service says that China Mobile's (NYSE: CHL) results for the financial year ended 31 December 2014 support the company's Aa3 rating and stable outlook.

"China Mobile's total revenue in 2014 grew by 1.8% year-on-year to RMB641 billion (about $104 billion), but that was negatively affected by the introduction of the value-added tax (VAT) last June. Excluding the impact of the VAT, underlying growth would have been around 5%," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

Revenue from the company's traditional businesses — including voice and texting — continued to fall, offset by robust growth in revenue from wireless data. Revenue from voice services fell 13% year-on-year, and revenue for short message service (SMS) & multimedia messaging service (MMS) fell 16%. At the same time, revenue from non-SMS data grew by 32%, driven by a 43% increase in revenue from mobile data traffic.

Moody's expects the company's total revenue to grow by a low-single digit percentage in 2015, supported by continued growth in data revenue, despite the expected year-on-year decline in revenue in 1H 2015, due to the VAT implementation.

China Mobile's reported EBITDA margin fell by 1.5% to 36.7% in 2014, because of product mix and higher operating costs. The company did, however, lower its selling expenses by RMB16 billion — a reduction of 17% year-on-year — and it plans to cut another RMB20 billion in 2015.

"It will be difficult for China Mobile to improve its margins, given the competition from traditional operators, as well as competitors such as over-the-top players," adds Tsuen who is also the Lead Analyst for China Mobile.

China Mobile's capex increased to RMB214 billion in 2014 from RMB185 billion in 2013, as it expanded its 4G or time division long-term evolution (TD-LTE) network. Capex already peaked last year, however, and the company expects it to fall slightly to RMB200 billion in 2015 and to fall further in 2016.

China Mobile generated RMB211 billion in operating cash flow in 2014, which after capex and a RMB47 billion dividend payout, resulted in negative free cash flow. With operating cash flow likely in the RMB220 billion to RMB230 billion range in 2015, and the maintenance of a 43% dividend payout, free cash flow will remain negative this year.

Nonetheless, the negative free cash flow can be absorbed, given China Mobile's large holdings of cash and deposits. At the end of 2014, the company retained cash and bank deposits totaling RMB428 billion as against total reported debt of RMB5 billion.

China Mobile's adjusted debt/EBITDA leverage stayed at around 0.3x in 2014, which remains strong at its rating level. The company's Aa3 rating and stable outlook take into account its strong cash position, low leverage, and dominant position in the growing mobile market. The rating is constrained by China's Aa3 sovereign rating.

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

China Mobile Limited is the leading provider of mobile telecommunications services in China, offering voice and data services in all 31 provinces and autonomous regions, as well as in Hong Kong.

The company is 73% owned by China Mobile Communications Corporation (unrated), which in turn is wholly owned by China's State-owned Assets Supervision and Administration Commission.

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