China Mobile:2H16,Earnings beat

China Mobile (CM) reported a good set of 2H16 results, with net profit of

Rmb48bn, up 17%YoY, excluding the impact of tower disposal gains, and6% above our expectation. Service revenue was in-line and up 6.5%YoY,despite a domestic roaming fee cut. Mobile ARPU rose 1% YoY withstrong 4G growth. Margin beat our expectation on lower marketingspend. CM kept HKD dividend flat at HK$2.732/sh by raising payout 3pptto 46%. It continues to aim for faster than industry growth in 2017 withan accelerated domestic roaming fee cut. Margin will likely be stable andcapex is in decline. With rising earnings and payout, HKD dividend couldincrease 5% in 2017. CM is our preferred play in the sector. Maintain BUY.

In-line service revenue, up 6.5% YoY

Service revenue grew 6.5% YoY to Rmb298bn in 2H. Strong 4G user growthtranslated into higher ARPU. 2H mobile ARPU grew 1% YoY to Rmb53.9although CM extended the domestic roaming fee cut nationwide. For 2017,CM continues to aim for faster than industry revenue growth. The gov’t hasset an industry growth target of 4%. The regulatory impact will likely bemanageable.

Margin beats expectation on lower marketing spend

Earnings surprised on the upside with better cost control. Marketing spendwas flat YoY, 5% below our estimate. Leasing fees were 20% below ourforecast. EBITDA grew 12% YoY, with margin up 1.9ppt YoY. Managementexpects marketing expense to increase in 2017 and EBITDA margin to eitherbe stable or decline slightly.

Kept stable HKD dividend

CM kept HKD dividend flat at HK$2.732/sh by raising the payout from 43% to46% for 2016. Management acknowledged that this will not be positivelyreceived by investors given the company’s mounting cash pile but CM remainscautious on its dividend policy. It expects payout to stay flat or rise slightly in2017. But with earning growing again in 2017, HKD dividend is likely to rise.

Lower capex; maintain BUY

CM spent Rmb187bn on capex in 2016, in line with guidance. Capex will fall6% YoY in 2017. Management expects capex/sales ratio to decline further in2018. 5G spending will not begin before 2019. CM’s FCF could jump toUS$8bn in 2017. CM remains our preferred sector play with strong 4G.