Seeking Alpha
Long/short equity, research analyst, foreign companies, Emerging Markets
Profile| Send Message|
( followers)  

David Riedel of Riedel Research Group recently published a report on NYSE-traded China Mobile (NYSE:CHL). There have been two pieces of important news for CHL recently. First, CHL acquired a 19.9% stake in a Hong Kong listed media company, Phoenix TV. We applaud CHL for the acquisition, because cooperating with a content provider can shorten the value chain of the mobile TV program in future. Furthermore, the acquisition target is profitable, rather than distressed.

Second, CHL announced a new regulation against service providers. Though there is a negative impact on SP through this new regulation, it is not as hard as was expected; this regulation is merely a show, due to the pressure from the Ministry of Information Industry. CHL need SP before it can be SP itself. We reduce the value added services revenue growth rate for 1H2006 and 2H2006, and calculated a target price of $30.04, though lower than before, this price is 14.0% higher than the current market price. Our rating: BUY.

CHL #1

Acquired Phoenix TV

CHL #2

CHL announced that its parent company, China Mobile [HK] Group Ltd. acquired 19.9% stake of Phoenix TV (8002.HK) from STAR Group, a wholly owned subsidiary of News Corporation. Though acquisition is never immune from risks, we applaud CHL’s decision for the following three reasons.

* Strategic Cooperation- The acquisition is an upward vertical alliance because Phoenix can be a content provider [CP] for mobile TV programs. CHL historical performance suggests that the voice business suffered maturation and stagnancy, while value added services enjoyed rapid growths. The acquisition helps CHL cooperate with CP directly rather than via a service provider [SP], therefore CHL can share more revenue in the value chain of mobile TV program in the future.

* Financial Performance of Phoenix- Phoenix, which is listed on the Growth Enterprise Market (GEM Board) of Hong Kong, began to make profit in 2004. Revenue in 2005 increased by 7.8% to HKD1.03 bn, while net profit increased by 20.6% to HKD181.5 mn. (Ibid.) We are satisfied with the net profit margin of 17.5% in 2005, though slightly lower than 22.0% of CHL. The debt ratio of Phoenix at the end of 2005 was merely 13.3%.

CHL #3

* Reasonable Acquisition Price- Total expenditure of the acquisition was HKD1.28 bn, based on HKD1.30 per share. Though 35.4x P/E is a little high, the bid price is only 11.3% over the average price of 200 trading days.

New SP Regulation - Not as Hard as Expected

On June 7 CHL announced a new regulation titled “Notice of Recent Regulation on Monternet Operation”, which implied that the widespread hearsay about “11 Clauses” had come true, at least in part.

The notice states that any WAP{1} subscriber who does not use the service for 6 months is treated as an automatic quit. It prevents SPs from subscribing services for mobile users without acknowledging them. The notice also states that Monternet system will automatically inform potential IVR{2} subscribers of the service charge. Any SP, who violates the regulation in three provinces or more, will be forbidden to run its business in all province subsidiaries of CHL.

However, in the notice there is no widely rumored re-confirmation clause, which means potential clients must confirm twice to subscribe a mobile service from SP. We believe if the reconfirmation comes into effect, it will be the last straw for SP, like TOMO etc. We also believe CHL would like not to use the re-confirmation clause, not for SPs but for the Company itself. Though CHL denied the importance of the SP to its profit{3}, value added service is the rapidest growing segment in revenue. Until CHL has full confidence to become a SP itself and establish CP alliance networks, like that with Phoenix TV, SPs are still important to CHL’s recent financial performance. In conclustion, this regulation is merely a show due to pressure from the Ministry of Information Industry.

Company Name Change

The name of the Company was changed from ‘‘China Mobile (Hong Kong) Limited’’ to ‘‘China Mobile Limited ’’ on 29 May 2006. The name change is a formal announcement that the listed company completed the acquisition of all major operation subsidiaries from its parent company.

Valuation

For the newly announced regulation, we reduce QOQ growth rates of “Other operating revenue” in 1H2006 and 2H2006 from 15% and 20%, to 10% and 15%, respectively. Maintaining all other parameters in our model, the target price estimate drops to $30.55, which is 14.0% higher than today’s market price. Acquirers are typically criticized in theory, however we believe that the alliance of CHL and Phoenix will form genuine synergy effects. Therefore we maintain our BUY rate for CHL.

CHL #4

CHL 1-yr chart:

CHL 1-yr chart

----------------------------------------------------------

{1} Abbreviation of Wireless Application Protocol, a.k.a. mobile internet service.
{2} Abbreviation of Interactive Voice Response, e.g. weather forecast.
{3} Guoxun Li, “SP Stock Prices went down when Monternet acted”, China Business Post, June 10, 2006.

Source: Recent Moves by China Mobile Show Promise (CHL)