Interpretation of the financial reports of the three major operators in the first three quarters: cold winter is coming, warm spring is still far away

On October 24, China welcomed the Frost Descent, one of the 24 solar terms, marking the transition from autumn to winter.

China's three major operators released their financial reports for the first three quarters of 2019 one week around the 24th. Data showed that the once "hugely profitable" communications industry has also ushered in a "double-reduction" period and is gradually entering a cold winter.

China Mobile's revenue and profit in the first three quarters continued to "double decline" following its interim results, and its net profit continued to shrink significantly; China Unicom's net profit was 9.823 billion yuan, an increase of 11.9% year-on-year, but its revenue and communication service revenue both showed negative growth year-on-year; China Telecom, which released its financial report last, also failed to maintain its original weak growth momentum, and its revenue and profit turned to negative growth at the same time.

The telecommunications industry continues to be under pressure and negative growth is inevitable

The communication operation data for the first three quarters of 2019 released by the Ministry of Industry and Information Technology showed that the three major operators' telecom business revenue totaled 991.4 billion yuan, which was the same as the previous year. Driven by the steady expansion of the scale of fixed broadband access users, fixed communication business revenue reached 314.6 billion yuan, a year-on-year increase of 9.4%, accounting for 31.7% of telecom business revenue; mobile communication business revenue reached 676.8 billion yuan, a year-on-year decrease of 3.9%, accounting for 68.3% of telecom business revenue. It is not difficult to see that the mobile communication business, which occupies an absolute dominant position, has dragged down the overall revenue.

The financial report shows that China Mobile's operating revenue in the first three quarters was 566.7 billion yuan, a decrease of 0.2% from the same period last year; among them, communication service revenue was 513 billion yuan, a decrease of 1.0% from the same period last year, EBITDA was 225.5 billion yuan, an increase of 5.3% from the same period last year, and profit attributable to shareholders was 81.8 billion yuan, a decrease of 13.9% from the same period last year.

China Unicom's operating revenue was RMB 217.12 billion, down 1.18% from the same period last year; of which service revenue was RMB 198.532 billion, down 0.7% from the same period last year, a decline that was slightly slower than the 1.1% decline in the first half of this year; industrial Internet business revenue was RMB 24.291 billion, up 40.8% year-on-year; EBITDA was RMB 73.145 billion, up 10.4% from the same period last year; profit attributable to equity holders of the company was RMB 9.823 billion, up 11.9% from the same period last year.

China Telecom's operating revenue in the first three quarters was RMB 282.826 billion, a year-on-year decrease of 0.8%, of which service revenue was RMB 271.484 billion, up 2.5% from the same period last year; EBITDA was RMB 91.973 billion, up 13.8% from the same period last year; profit attributable to shareholders was RMB 18.389 billion, down 3.4% from the same period last year. Excluding the one-time gain from China Tower's listing in the third quarter of 2018, it increased by 2.5% year-on-year.

In recent years, China Telecom has been the best performing operator. The decline this time shows that the telecommunications industry is really facing great pressure under the rapid decline of traffic dividends and the continuous policy of speed increase and fee reduction. In the post-4G era, the trend of weak or even negative growth in revenue and profit is inevitable, and now it is facing large-scale investment in 5G construction. After the "double decline", it may be difficult to "warm up" quickly for a while.

Operators return to rationality and start the road of self-rescue

Judging from the financial reports, the three major operators are actively responding to the overall decline of the telecommunications industry and working hard to increase the number of users and business innovation capabilities. According to data released by the Ministry of Industry and Information Technology, as of the end of September, the total number of mobile phone users of the three basic telecommunications companies reached 1.598 billion, a year-on-year increase of 3.3%; the total number of fixed Internet broadband access users reached 450 million, a net increase of 42.48 million over the end of last year.

While continuing to expand the scale of users, the three major operators began to return to rationality from the almost crazy "mutual harm" mode, and gradually cancelled unlimited data packages. In early August, China Telecom took the lead in switching the speed-reduced version of the Enjoy Package to the regular version of the Enjoy Package, canceling the unlimited package in disguise; then, China Mobile notified that it would stop selling the original speed-restricted package before the end of August, and officially switch to the unlimited speed package on September 1; shortly afterwards, China Unicom also announced that it would stop selling unlimited data packages on September 1.

After years of "grabbing" the fixed-line broadband market, the three major operators no longer provide users with "free lunches" and have started to charge broadband initial installation fees. In early October, China Mobile began to charge 100 yuan for comprehensive labor and material fees (basically understood as initial installation fees) for newly installed fixed-line broadband users; at the same time, it raised the threshold for free broadband and cancelled the free broadband service for mobile phone packages below 58 yuan. In addition to China Mobile, the other two operators also changed their broadband rates. China Unicom and China Telecom both require a one-time payment of 100 yuan for comprehensive labor and material fees/adjustment fees for initial broadband installation, and IPTV set-top boxes and related services are no longer free.

In addition, China Mobile stated in its financial report that it will continue to promote the "four-wheel drive" integrated development, further enrich integrated products, strengthen integrated marketing, promote integrated operations, expand market space, and strive to restore growth in communication service revenue throughout the year.

China Telecom will comprehensively promote "cloud transformation" to further explore new customer information needs through cloud-network integration and Internet of Things-cloud integration. Cloud business will maintain rapid growth and lead the vigorous development of DICT5 and Internet of Things business.

China Unicom admitted that its net profit continued to increase significantly in the first three quarters, thanks to good cost control. In the future, it will continue to deepen the implementation of the strategy of focusing on innovative cooperation, accelerate the transformation of Internet-based operations, deepen mixed-ownership reform, and maintain rapid growth in innovative businesses, thereby supporting the overall service revenue to remain basically stable.

5G's new business model still needs to be explored

The growth of traditional business revenue has almost peaked, and the "four-wheel drive" and "cloud transformation" are not enough to form a strong support, but 5G is coming. The issuance of 5G licenses in June this year has accelerated the industry process, and the 5G packages that will be launched on November 1 will officially open the 5G era. It is understood that as of now, the three major operators have more than 10 million 5G pre-order users.

In August this year, China Mobile stated in its first-half financial report that it would invest 24 billion yuan in 5G construction, which is a lot of money compared to China Unicom's 8 billion yuan and China Telecom's 9 billion yuan. It is reported that China Mobile will build more than 50,000 5G base stations this year and realize 5G commercial services in more than 50 cities. In 2020, it will be further expanded to more than 340 cities across the country, and will coordinate the 2.6G and 4.9G frequency bands to achieve low-cost and efficient network construction.

In September this year, China Unicom and China Telecom signed a cooperation agreement and announced to jointly build a 5G access network across the country. Both parties said that 5G network co-construction and sharing cooperation, especially continuous 5G frequency sharing, will help reduce the future 5G network construction and operation and maintenance costs, efficiently achieve 5G network coverage, quickly form 5G service capabilities, enhance the market competitiveness of 5G networks and services, improve network benefits and asset operation efficiency, and achieve mutual benefit and win-win results for both parties.

However, it must be said that the decline in profitability makes it difficult for operators to make a difference in the 5G era. 5G requires a lot of continuous investment and the need to find a new business model, which takes time and exploration.

As a pioneer of operators, China Mobile released the 5G+ strategy in June this year, planning to promote 5G+AICDE collaboration and build 5G+Ecology based on 5G+4G network. At present, it has carried out joint exploration with leading enterprises in 14 major industries, and has implemented it in many fields such as smart factories, smart transportation, and smart medical care. It will create 100 benchmark demonstration applications in 2020. However, it is not clear when 5G will bring real money and silver revenue for a while. Relying solely on the package revenue contributed by tens of millions of 5G users across the network is really a drop in the bucket.

After the frost comes the honeysuckle. It seems that it will take some time for operators to usher in the "warm spring".