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Paulo Santos, Think Finance (376 clicks)
Long/short equity, arbitrage, event-driven, research analyst
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This is a tale of two giant telecoms which, in many ways, are very similar. I am talking about Verizon (VZ) and China Mobile (CHL).

Size

Presently, Verizon is the larger company, with TTM revenues of $117 billion versus China Mobile's $89.4 billion. Verizon's revenues are growing at a 4% clip, whereas China Mobile at this point is growing just 2% faster at 6%.

However, Verizon is somewhat distinct from China Mobile, in that China Mobile is a pure wireless operation, whereas Verizon still has a large wireline operation accounting for 1/3 of its revenues. And worse still, Verizon controls just 55% of Verizon Wireless, with the rest being held by Vodafone.

Not only that, but China Mobile's size in terms of wireless subscribers dwarfs Verizon. At 2012 year end, China Mobile had 710 million subscribers, to Verizon's 98.9 million (connections). Obviously Verizon's subscribers pay a lot more, but this only reinforces the fact that China Mobile has much more room to progress as China's economy becomes better able to pay more as well. On top of this, the China Mobile customer base is hardly using 3G data, with just 88 million subscribers using it at 2012 year-end and China Mobile is still building out LTE. This, too, tells us that there is further room to sell additional services and bring in an higher ARPU (Source: China Mobile presentation; Verizon presentation).

Valuation

  • Verizon trades at 22.1 times 2012 earnings and 18.3 times estimated 2013 earnings. China Mobile trades for 9.7 times 2012 earnings.

  • Verizon trades at 4.4 times book value where China Mobile trades at 1.7 times book value.

  • Verizon trades at 6 times EV/EBITDA where China Mobile trades at 3.5 times EV/EBITDA.

All in all, China Mobile is cheaper than Verizon on all counts.

Dividend yield

At the close of Friday, Verizon's dividend yield comes to 4.03%, whereas China Mobile's is very close at 4.18% (for a payout ratio of 43%).

The China Mobile dividend and payout ratio have been growing steadily over the years, with the dividend payout more than doubling in the last decade and the dividend going up 10 times (Source: China Mobile).

The Verizon dividend has grown much slower, increasing just 33% in the same timeframe. This betrays its much more mature state, even if China Mobile should also, at this point, see a lot slower growth given its size (Source: Verizon).

Prospects

As we saw when discussing the relative size, China Mobile has a lot more room to grow due still having a low intensity in terms of data usage. Also, China Mobile's ARPU is much lower at around 1/6th to 1/7th of Verizon's. As the Chinese economy grows and inflates, it's likely that the ARPU difference will contract, leading to faster growth for China Mobile.

It's also noteworthy that China Mobile has not yet reached an agreement to introduce the Apple (AAPL) iPhone in its network. It might be possible that one such introduction would also lead to higher data usage and growth, though the difference to Google's (GOOG) Android should be getting smaller.

Putting everything together, China Mobile has better growth prospects than Verizon and is not encumbered with wireline assets or with the potential need to buy out a partner in its giant wireless division, like Verizon is.

Conclusion

The conclusion we can draw is that Verizon and China Mobile are very similar on many grounds, but overall China Mobile is cheaper fundamentally and has better growth prospects at the same time. It thus seems only fair to recommend switching from Verizon stock to China Mobile stock, for those holding Verizon stock. Or to buy China Mobile, for those holding neither.

Source: A Tale Of 2 Giant Telecoms With Giant Yields