China Mobile <0941.HK>, the world's largest mobile carrier, faces a further squeeze on profit margins as competitive pressures intensify and an expensive buildout of a new, untested 3G network weighs.

The firm, which had 493 million users at the end of June, on Thursday posted its slowest interim profit growth since it listed in 1997 and said it expects average revenue per user (ARPU), a key barometer of earnings, to slide in the months to come.

Like smaller rivals China Unicom <0762.HK> and China Telecom <0728.HK>, which now compete with a full range of services after a major Beijing-ordered restructuring last year, China Mobile is aggressively moving into poorer and less profitable rural areas as urban markets become saturated.

We can't preserve such a (high) margin for the long term, Chief Financial Officer Xue Taohai told a media briefing.

Its expensive rollout of a new third generation (3G) network is also off to a rough start due partly to an untried domestic standard it has been assigned to develop as part of the government push to encourage home-grown technology.

The results failed to excite investors in any way, said Marvin Lo, a Hong Kong-based sector analyst with Daiwa.

We do see some funds chasing the other two smaller operators, thinking they will do better eventually, he said.

China Mobile shares ended down 0.2 percent, lagging Hong Kong's China Enterprises Index <.HSCE> 2.3 percent rise. China Unicom ended 3.6 percent higher and China Telecom gained 1.6 percent.

PLAYING INTO WEAKNESS

China Mobile posted a 1.6 percent drop in quarterly profit, slipping to 30.1 billion yuan ($4.4 billion) versus a consensus forecast of 31.4 billion yuan, according to Reuters calculations based on previously reported figures.

That compared with a restated profit of 30.6 billion yuan for the second quarter of 2008.

China Mobile posted a first-half profit of 55.3 billion yuan, slightly lagging a consensus forecast of 56.6 billion yuan from a Reuters poll of eight analysts. It added at net 35.9 million subscribers in the first half.

In addition to being burdened with directing China's home-grown 3G buildout, the untested TD-SCDMA standard lacks commercially available handsets and is saddled with a poor network infrastructure, said Allan Ng of BOCI Securities.

The company will post flat or slightly lower full-year earnings due to competition from the other two other operators, said Ng.

Monthly ARPU fell to 75 yuan from 84 yuan a year earlier, adding to pressure on profit margins.

Its margin on earnings before interest, tax, depreciation and amortization (EBITDA) in the first half was 51.6 percent, falling from 53.2 percent from a year earlier.

3G LOOMS

Regulators have said the country's three carriers will spend $58.5 billion through 2011, building out their 3G networks which will offer more sophisticated internet, data and video services. China Mobile set to spend $8.6 billion this year alone on its TD-SCDMA network.

But customers are wary of signing on to the new standard.

China Mobile said it had less than one million 3G users in June and predicted it would have 3 million by year end, but that is far short of the 10 million the official Shanghai Securities News said the firm had originally targeted.

The company gave a lofty target of 30-85 million 3G subscribers by 2011.

China Mobile maintained its 43 percent dividend payout ratio, or HK$1.346 per share for the first half, despite sitting on a 90.7 billion yuan mountain of cash and cash equivalents.

Some investors had been hoping the firm would increase that payout ratio.

China Telecom, the nation's dominant fixed-line phone firm, and China Unicom report earnings next week.

($1=6.83 yuan)

(Reporting by Kirby Chien and Joanne Chiu; Editing by Ken Wills and Lincoln Feast)

China