About two months ago I wrote an article entitled "AT&T vs Verizon: Which is the Better Value?" that tried to determine which major domestic wireless carrier had the greatest value, AT&T (T) or Verizon (VZ). Since then I have been thinking more about that article and feel like I should also comment on another major wireless play, that being China Mobile Limited (CHL).
China Mobile Limited is an investment holding company that happens to be China's largest wireless and telecommunications provider. China Mobile Limited offers its customers telecommunications network planning, design and consulting services. The company offers services to almost 715 million people within China mainland and Hong Kong. The company competes primarily with China Telecom (CHA) and China Unicom (CHU).
I know that I am comparing China Mobile Limited to Verizon and AT&T, when technically it is not an apples-to-apples comparison. From an investor's perspective I find comparisons relative and it's more a question of where can my money be best put to work. With that in mind there are several factors that cause me to like China Mobile Limited better then Verizon or AT&T.
- China Mobile Limited does not have the large burden of funding pension funds for retirees - AT&T spent $10 billion and Verizon spent $4.5 billion - I would much rather see that money be put to building out infrastructure or given back to shareholders
- China Mobile Limited has 715 million customers - Compare that with Verizon with 94.2 million or AT&T at 100 million
- China Mobile Limited stock valuation is currently trading with a P/E of 10.33 - Compared with AT&T at 31.24 and Verizon at 163.6
- China Mobile Limited is mainly run by the Chinese government - I review this below
Like most Chinese companies the government is a major stakeholder in the company and ultimately dictates a great deal of the contracting and business operations. This type of relationship can be both good and bad for a shareholder. It is good from the standpoint that it is highly unlikely that the company will ever go bankrupt or disappear. The bad, is that sometimes government politics get in the way of what might be a great business opportunity for the company. The Chinese government's control is maintained through a government-owned holding company, which holds over 71% ownership of China Mobile, while the remaining stake (29%) of the company is controlled by public investors.
Even though it may seem there could not be anything wrong with China Mobile Limited there are several factors where I feel that Verizon and AT&T have the upper hand.
- China Mobile has not announced a new share buyback since the beginning of 2012 - Compared with Verizon, which plans to buy back 100 million shares and AT&T, which plans to buy back almost 600 million shares
- China Mobile Limited does not have consistent dividend increases nor does it reward shareholders when it has large amounts of cash on hand - Both AT&T and Verizon increase the dividend rate by about 3% each year and will increase by more if cash allows
- China Mobile Limited has an old and aging wireless network that needs updating - AT&T has 4G LTE in 135 cites while Verizon has 4G LTE in 476 cities/rural communities
- China Mobile Limited is mainly run by the Chinese government - I review this below - I did say it was good and bad
Due to the high level of involvement that the Chinese government has in China Mobile Limited a lot of companies find it too restrictive and burdensome to do business in China, and especially with China Mobile Limited. Google (GOOG), which has gone back and forth numerous times with the Chinese government on the use of its search engine, no longer does business in the country. Apple (AAPL) on the other hand does sell its phones in China, but has yet to strike a deal with China Mobile Limited.
The main hold up for an iPhone deal has really involved two things. China Mobile has not had a strong enough network to support the phone (or other phones like it) and the fact that unlike U.S. carriers China Mobile Limited does not subsidize mobile phones with the signing of a contract. Chinese wireless customers have to pay full price for their phone. This may not seem like a deal breaker, but keeping in mind that the average income in China is around $3,000 per person paying full price for an iPhone, which can retail for around $600 - $700 is a substantial investment. To help offset this while still meeting demand the street has been asking Apple to come out with a lower priced phone.
To help fix the aging network issue China Mobile last month did announce that it planned to spend around $6.7 billion to build out its 4G LTE network. This new network is estimated to reach over 500 million customers in over 100 cities across China. This is a significant move for China Mobile allowing the firm to take a step closer to an iPhone deal, which would only increase overall user demand while bolstering profits for the company.
From a financial perspective China Mobile Limited has very strong financials for a telecom company. The company reported 2012 net income of $20.62 billion on revenue of $89.38 billion. It has a nice cushion of cash on its balance sheet totaling $64.25 billion. The stock currently trades for around $53 per share, which trades at roughly 10 times earnings with a book value of $28.70 per share. The operations of the company generate almost $36.8 billion in free cash flow.
Given such strong financials and overall valuation, let's see how China Mobile stacks up against the U.S. domestic leaders AT&T and Verizon. The below chart highlights some of the key metrics from each company and compares them with each other.
2012 Net Income
Share Buy-Back Amount
Cities with 4G LTE
Return on Equity
Looking at the above chart China Mobile is the clear winner from an overall valuation standpoint. Not only does China Mobile make more money from a net income (almost two times as much as Verizon and AT&T combined) standpoint then AT&T and Verizon, but the company's stock is priced at a much better valuation. Currently at 10 times earnings compared with Verizon at 164 and AT&T at 31. Additionally, from a future growth standpoint China Mobile has more potential to continue to deliver high returns to its shareholders simply because of the high growth and demand in China for consumer electronics. From a fundamental standpoint China Mobile has been able to deliver an 18.81% return on equity year over year compared with Verizon's 12.32% and AT&T's 7.60%.
If Apple is able to secure a contract with China Mobile Limited while also providing it with a lower priced iPhone the continued growth potential for China Mobile Limited could prove to be explosive. I know it is strange to think of a telecom company as a potential growth company, but what I like the most about China Mobile Limited is the fact that it not only has a great deal of growth potential, but it currently trades as a value stock with a nice dividend to boot.
For investors looking for the best of both worlds in the telecom sector I would recommend China Mobile Limited as the choice. Now, that is assuming investors don't mind having some direct exposure to China through a government controlled company. If a domestic carrier is the only choice, then I will defer to my last article and suggest AT&T as the better investment option.
For those that already own some of our domestic wireless plays I would strongly suggest swapping out some of them and replacing them with some China Mobile Limited. Why not get the same dividend yield with increased growth potential at a better overall value?