TOKYO -- China's three largest mobile telcos are approaching the country's 5G expansion with caution in a sign of how government ambitions for a swift rollout are clashing with industry's desire to keep a tight rein on spending and reward investors.
While the government sees 5G as a key strategic priority, the carriers have mapped out plans to be as prudent as possible as economic growth stalls.
"Even though this year marks the beginning of the three-year peak period for 5G investments, the company's overall capex is not going to expand that much," Yang Jie, chairman of China Mobile, said during an earnings teleconference last week. China Mobile is the top mobile carrier by subscriber numbers.
China Unicom and China Telecom also highlighted how they are trying to build out 5G capability at low cost, collaborating on investment even though they are competitors.
China's government is promoting the fast rollout of 5G as a symbol of technological superiority. Investing by state-owned telecoms is also a traditional way to help pump up the economy, especially given the current underlying weakness and the coronavirus-caused turmoil.
But mobile carriers' overall 5G prudence reflects uncertainty about whether they will derive an adequate return on their investments, especially when they already face flat or even negative top-line growth.
While China Mobile saw its revenue last year increase 1.2% to 745.9 billion yuan, China Telecom suffered a decline of 0.4% and China Unicom of 0.1%.
On top of this, the three carriers were virtually forced to cut their tariffs for the past couple of years, after receiving verbal instructions from Premier Li Keqiang at official occasions such as the National People's Congress. In addition, a mobile number portability system allowing users to switch carriers without changing phone numbers was introduced in November.
The government pressure comes as telcos confront a saturated market and the coronavirus outbreak. They registered a net loss of 21.42 million mobile subscribers during the first two months of the year, according to statistics released by the regulator this month.
All three companies said 5G network construction had been delayed due to worker and equipment shortages, and because lockdowns made sites inaccessible.
China Mobile during its earnings teleconference said it would spend 179.8 billion yuan ($25.4 billion) in total capital expenditure in 2020, 8.4% more than last year. However, this is much less than analysts had expected from the cash-rich company, which had over 300 billion yuan of cash and deposits as of the end of last year.
Even as it enters a peak investment period, the Hong Kong-listed company is proposing a 1% increase to its annual dividend to 3.25 Hong Kong dollars per share, when its full-year net profit for 2019 was down 9.5% to 106.6 billion yuan. "The company's policy was to maintain a stable payout ratio," Yang said, "but that would mean less dividend and that is not what I wanted to see happen." He pledged a "stable" dividend outlook in the years to come.
"Prudent capex and stable dividend rebuild market confidence," wrote Michael Meng and Wang Yuyang, analysts at BOCI Research, a subsidiary of state-owned Bank of China (BOC). They said they were assured by the commitment that the telco's "total capex is unlikely to see significant increase," even for the next three peak years.
Ramakrishna Maruvada, telecom analyst at Daiwa Capital Markets, said capex guidance was 9% lower than their forecast. He added that China Mobile's management had given a clear indication that there is no aggressive plan to subsidize 5G handsets. The developments "should put an end to investors' fears over irrational 5G expenditure," he said.
Meanwhile the smaller two carriers, China Unicom and China Telecom, are sharing 5G investments under the "co-build, co-share" framework.
Wang Xiaochu, Chairman and CEO of China Unicom, said during a teleconference that collaboration meant "both sides are able to save over 40% of their investments." As a smaller partner, Unicom foots 40%, while Telecom pays the rest. So far they have saved a total of 10 billion yuan in 5G investments.
Ke Ruiwen, chairman & CEO of China Telecom, during a teleconference on Tuesday confirmed a potential enlargement of the cooperative framework with Unicom. "The effect of co-build, co-share with Unicom is extremely good," he said, stressing the merit of cash savings, including operating expenses.
Unicom is raising its capital expenditure 24.1% to 70 billion yuan, while Telecom's capex is to expand 9.6% to 85 billion yuan. However the increases are much smaller than expected -- and feared -- by investors.
Given the excessive enthusiasm surrounding 5G investments, the fact that "market expectation on China's 5G capex in 2020 has been too high has been vindicated by the telcos' weak capex guidance," Jefferies analyst Edison Lee said after China Telecom's announcement on Tuesday.
The 5G caution contrasts with bullishness shown by equipment supplier Huawei. The Nikkei Asian Review reported on Tuesday that Huawei is keen to ramp up spending on 5G as it faces slower smartphone sales and as Chinese President Xi Jinping has vowed to increase spending on crucial infrastructure.
Despite government intentions to spend more on 5G, another pair of "co-build, co-share" arrangements may surface between China Mobile and a fourth player, China Broadcasting Network.
The state-owned broadcaster has no incumbent mobile network but has been granted a 5G license as a newcomer. Yang of China Mobile admitted that "we are indeed currently in talks with CBN on the possibility" of sharing and saving investments on 5G.
Yang said his company's 5G investment plan is the result of a "comprehensive deliberation considering various aspects, including keeping capex at a reasonable level."