If you are the largest company of your kind in the world, dominating the world's fastest growing economy, how much can you possibly grow?
When you consider that China Mobile's (NYSE:CHL) subscriber base represents only 43% of the country's 1.35 billion residents, that it still doesn't offer smartphones or 4G coverage but likely will soon, and there is no risk of foreign competition, growth prospects actually look pretty good.
China Mobile is a $220 billion giant based in Hong Kong. The company provides telecommunications services primarily in Mainland China. It has more than 700 million customers, making it the largest telecom carrier in the world, six times larger than AT&T (NYSE:T).
Sales from 2008 to 2011 grew from $60.43 billion to 83.89 billion, up 39%. Net income from the same period increased from $16.53 billion to $20 billion, up 21%. The outlook for 2013 is equally encouraging, with the company expecting to grow revenue by 5.4% to $88.5 billion and earnings per share by 7.6% to $5.61.
The stock price, however, has not mirrored the company's growth. In the last five years, the stock price is down 25% and down nearly 45% from the 2007 market peak of about $103. Shares are trading at between $55 and $56, up around 6% in the last year.
The stock looks cheap, with a trailing price-to-earnings ratio of 11 times and a forward P/E of 9. In addition, the company has roughly $15 per share in cash.
Its balance sheet should impress any tried-and-true capitalist. Its 10-year average return on equity (ROE) is 21.84%, it has an extremely low 4.2% debt-to-capital-ratio, it is sitting on a hefty $52.8 billion pile of cash and it pays a dividend payout ratio of 36%, which is low for telecom companies.
Growth On The Horizon
China Mobile's growth prospects largely hinge on its upcoming deployment of 4G technology, which will usher in the availability of smartphones to its customers. China Mobile relies largely on 3G technology, but is upgrading to a 4G network. Yet even without 4G and smartphone access, the company expects to have added 30 million 3G subscribers in 2012, about 5% growth, when it makes its annual financial report. The fast-rising 4G network demand will also be crucial to the company's growth in 2013.
With the 4G network coming into place, China Mobile is negotiating a deal to sell Apple's iPhone.
The company also looks to ride the wave of a growing economy. A recent survey has shown that manufacturing in China, the world's second largest economy, expanded for the first time in 13 months. The government reported that China's GDP expanded by 7.9% in the fourth quarter from a year earlier. That was the best increase since the economy gained 8.1% in the first quarter. For all of 2012, the economy grew 7.8%, though that was its slowest gain since 1999.
Knocks on China Mobile relate more to the Chinese economy and culture more than the company.
For example, some analysts warn that many industries in China have way more capacity than even its large, growing economy can field. This includes the wireless sector. Some question whether demand will match the huge investment in 4G networks that companies like China Mobile are making.
Then there are cultural and governmental issues unique to China that could have an impact on its overall economy. A recent report in the New York Times warns of air pollution in Beijing being among the worst in the world.
Additionally, some are questioning the reliability of economic information coming from the country. This became an issue after the government reported a surge in exports.
"China's numbers are nowhere near as accurate as ours, their methodology is simply not at the same level as ours," Stanford professor Ed Lazear told Bloomberg News. "But we certainly know they're growing at very high rates. I don't worry too much about a half a percentage point or even a percentage point one way or another."
Economic data are not the only numbers questioned within China. Company financial reports are also under scrutiny. Caterpillar learned this the hard way. The heavy equipment manufacturer recently had to take a $580 million writedown for ERA Mining Machinery, a Chinese equipment maker Caterpillar purchased in June 2012. An audit revealed account discrepancies, leading to the extra impairment charge, which equaled about two-thirds of the $886 million purchase price.
There are also continuing concerns about human rights violations, the impact of the country's one-child policy on future population growth, censorship and the continuing ownership and control by the government.
That last factor is one of the potential downsides of China Mobile, which is state owned. According to some, that fact led to the company using technology that differs from the standards used globally, which has become a competitive disadvantage.
The Big Picture
It dominates the Chinese market because foreign carriers are excluded from operating there. Without that competition, China Mobile has little incentive to innovate or provide new products and services to consumers. Also, there's no way to expand beyond China because of the nation's closed off nature.
But China Mobile may have enough of a motivation to act less like a goliath monopoly due to something that one wouldn't expect it to have: competition. Smaller rivals like China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA), who carry the iPhone and operate mainly in the urban areas of China, are slowly cutting into China Mobile's market share.
And if the company were to behave like a true monopoly, it sure wouldn't be investing in a 4G network and luring Apple's iPhone into the market.
Additionally, the company has unrivaled scale efficiency, the highest margins in the industry, an impressive financial position and a recognizable brand.
The question remains: Can it still grow enough to reward investors?
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Business relationship disclosure: This article was written by an analyst at Catalyst Investments.