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China Mobile: Looks Like Value, Smells Like Growth

by: Ryan Barnes October 13, 2008 | about stocks: CHL    

Ryan Barnes

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I’ve been intrigued at just the concept of “China Mobile" for many years. It stands to reason that some company is going to lead the way in providing mobile phone services to the Chinese economy, and that company would make truckloads of money in the process. China Mobile (CHL) is the definite #1, at more than twice the revenue of its two closest competitors - which is both a good thing and a bad thing when you do business in China.

The growth side of the investment thesis is quite simple - there is still a relatively small penetration of the rural markets in China, which is why China Mobile is racking up…get this….7 million new customers a month. Take a look over these slides form the company’s mid-year investor summary:

click to enlarge images

Key Takeaways:

  • Subscribers up over 24%;
  • Operating Leverage coming in through SMS services, mobile apps, etc - net profit up 44% in 1H08 on less than 18% revenue growth;
  • Payout ratio is sustainable, and dividend should rise between 30-40% next year (currently yielding about 4%);
  • Dividends paid in HKD, which is kept at par with the U.S. Dollar.

There are, of course, many downsides to trying to be a capitalist in China. The most recent example is the reorganization plan mandated by ruling government arm of the telecoms, the China Mobile Communications Corporation (CMCC). The want the top six telecom providers to merge into three, resulting in some complex forced M&A activity.

The resulting landscape has China Unicom (CHU) (#2 big dog) and China Telecom (CHA) (#3 big dog) now set to invest billions in building out their mobile networks, where they will compete directly with China Mobile.

This news has certainly dragged on CHL shares, but it is lost in the general 50% plus chop seen in all global equities. Long-term however, even though CHL’s subsriber growth will be impeded, I love the competitive advantage seen by China Mobile. They’ve already build up their network, and anyone having to access capital over the next few years will be paying much more for it than China Mobile ever had to.

Growth vs. Value

Looking over the fundamentals (which, believe it or not, the markets will eventually come back to), China Mobile looks like a value stock. The forward multiple is roughly 9 times the FY09 estimate of $5.00/share. The dividend is above the benchmark Treasury yield and rising. EV/EBITDA is less than 5x, and debt/equity is insanely low at .08

I believe that whether the China Growth Story has tapered off or just been napping since the Olympics, the stable yield, operating leverage and double-digit subscriber growth should keep investor capital attracted to this stock.


Disclosure: Author does not hold shares of the companies mentioned.

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This article has 6 comments:

  •  
    Oct 13 09:18 AM
    The thing is, how can we trust their books ?
    Like the label on the baby formula, not good !!
    Reply
  •  
    Oct 13 10:23 AM
    I don't agree with your analysis. It is too basic and doesn't go deep enough to the root of the problem. The problem lies with the Chinese central government and regulator (MIIT). Despite its depressed values, the Chinese want to have its telecom markets appear competitive both internally and in the world arena, and CHL is anything but that. As it grows so does it monopoly power in China's wireless market. As a result, the Chinese government has stepped in and placed asymmetric regulations on network sharing with rivals. This has the effect of allowing smaller competitors to "mooch" off of CHL's strategic network builds (almost for free), which will allow competitors to grow faster at CHL's expense. Furthermore, since CHL is the largest mobile operator in China, the MIIT administration is hard bent on the cultivation and success of TD-SCDMA mobile technology (China's own attempt at 3-G) and having CHL front the majority of the cost. In the meantime, CHL's smaller competitors are free to build better 3-G wireless technology that is more compatible and user-friendly for consumers. Again, competitors may be able to leap frog over CHL's hold on the the mobile market and take market share. Finally, TD technology is not only expensive to build but also requires heavy tailored subsidized mobile product offerings to even entice adaption by users. So, yes, CHL is seeing a lot of cash flow come in, but they are also putting it in the toilet through the TD initiative while competitors are getting stronger. I would suggest you do more work then simple P/E valuation, because the "E" and the implied growth in that multiple matters a lot in this new landscape. I own CHL at an average price of $70 and I hope to make back my money in two years.
    Reply
  •  
    Oct 13 02:28 PM
    I appreciate the summary comments valueinvst (don't worry I won't call them 'basic'), although I don't understand why you own the stock at $70 if you're so dour on their prospects. Your simplistic comments don't address the "E"....or any numbers for that matter. the only dollar figure I see is the high cost basis of your stock.
    Reply
  •  
    Oct 14 01:16 AM
    The Chinese market is a true gamble. CHL is a strong company with the government ties it needs, but it seems they may not be as tight with the government as they were a year or two ago. The 3G talk has been just that for about three years now, will they ever start it? If they do, it might be to late. How long before something better comes about. CHU looks to be in a pretty good position right now.
    Reply
  •  
    Oct 14 10:58 AM
    At the end of 2008, China will have only 50% mobile phone penetration. The remaining 600mil Chinese equals a market opportunity twice the size of the Unites States.
    Even with new and increased competition, the long term trend is up.
    Reply
  •  
    Oct 14 02:11 PM
    I didnt' have enough time to get into the "E" of the P/E ratio. The basic premise is that earnings might be substantially depressed as new competitors take market share through asymetric regulation and a weaker TD is CHL-funded and adoption is low. In the end, CHL will need to build on a better 3G technology. Which means that growth in earnings might fall short of exectations, which translates into a more fair value at current levels. My $70 price is only suggesting that if today's prices are fair for CHL, and growth is modest, then the stock should hit my cost in hopefully 2 yrs. So at current levels it is a better buy, but a long term hold. I have not factored in China volatility, but that's the simple math. This is a long term hold for me, so I am not too worried, but don't expect a huge surge in the stock b/c the older dynamics of a simple lower cell phone penetration is not enough. I did the same analysis you did five months ago.
    Reply
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