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TheStreet Open House

'King Kong' China Mobile Running Out of Room for Growth

Stocks in this article: CHL CHU CHA AAPL TCEHY ALBIY

BEIJING (TheStreet) -- The gorilla at the top of the Chinese telecom mountain, China Mobile (CHL) fears no challengers. What it should fear is the future.

The company enjoys strong support from the Chinese government, its largest stakeholder. And China Mobile's main rival, China Unicom (CHU), is only a monkey on the mountainside with 37% as many subscribers, and less than half the revenue and one-eighth the net income that China Mobile reported for the first quarter.

China Mobile is the world's most popular cellular carrier, with 787 million subscriptions as of May. Almost everyone in China old or young enough to swipe a screen carries at least one device equipped with a China Mobile SIM card.

But the gorilla may be running out of room for future growth. China's economy is cooling, and consumer prices are rising for non-discretionary items such as food. A new value-added tax on telecom services that took effect June 1 is likely to bite into telecom profits. And free, Internet-based voice and messaging services are undermining traditional telecom revenue sources.

Moreover, mobile Wifi plans offered by China Unicom and third-place carrier China Telecom (CHA - Get Report) are giving the country's urban consumers plenty of choices.

Everbright Securities has rated China Unicom's stock a buy, given the company's 74% year-over-year increase in first-quarter net earnings to 1.1 billion yuan. The report cited strong sales of China Unicom's broadband Internet services and expectations that the company may spin off assets as the Chinese government opens more state companies to private investment.

China Mobile is actively seeking growth. It's building a faster, 4G Wi-Fi network that will accommodate the free voice and messaging services used daily across China, such as Hong Kong-listed Tencent's (TCEHY) WeChat and QQ. The 4G network, which will cost an estimated $39 billion, will cover about 340 cities. A 5G network is being planned.

Moreover, China Mobile is cooperating with 17 wholesale Wi-Fi marketing companies, called mobile virtual network operators, such as Alibaba's (ALBIY) Ali Telecom. Alibaba is an e-commerce concern with an IPO pending in New York.

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