The salesgirl told me that I should buy a cheap Samsung at about $250 USD because it was a pretty good phone for the price if I did not want to buy a PDA or a fancier phone. I bought the Samsung, which did not seem too cheap to me, and gave it to my wife. I am now using her Mitsubishi, which is still working.
My experience in shopping for a new phone reminded me of the importance China’s 416 million mobile phone users place on mobile phones. As buying a home or a car like GM’s (NYSE:GM) Buick still remains out of the reach of most Chinese consumers, they instead put their aspirations into buying a top mobile phone where even a $250 USD one is considered cheap. My firm, the China Market Research Group CMR (www.researchcmr.com), conducted interviews among Chinese youth in Shanghai and Beijing and found for more than 60% their single, most expensive purchase in the last year was for a mobile phone. The number went even higher when you take out those earning more than $3000 USD a month. On average, all socio-economic classes changed mobile phones once a year, some as often as every 6 months.
So how should retail investors take advantage of China’s booming mobile phone market?
Cool and Hip: The Handset Makers
One can simply buy the stocks of top handset makers; however, this is somewhat risky as Chinese consumers are notoriously picky from season to season as to what is hot or not. I have an article coming out soon on Motorola’s resurgence in China because of its savvy investment into industrial design. But from year to year a style can go out of fashion and leave handset makers scrambling.
Nokia or Samsung seems to be the best bets for conservative investors as Nokia has carved out a reputation as best quality while Samsung as good value. In the interviews CMR conducted, respondents overwhelmingly said that Nokia was the best quality phone. Samsung came in as a great quality phone that had lots of tools at a good price. You can also get exposure to Samsung by buying iShares EWY (NYSEARCA:EWY), which tracks Korea’s stock market. This might be a smart move for investors who want to get exposure to many of Korea’s companies that are doing well in China.
Chatting and Singing to the Money: Mobile Value Added Services
Investors should realize that the mobile phone plays the role of social connector in China. These days the mobile phone is less about talking and increasingly about value added services [VAS] in the form of text and picture messages, mobile music, mobile internet, online games, ring tones, mobile bill payment and other services. It is also a prized item of prestige and is a way for consumers to differentiate themselves from others by customizing designs and ring tones.
In 2005, the number of mobile users in China billed for mobile gaming numbered 139 million, more than the total number of Chinese internet users at about 123 million in 2006. The market in 2005 was valued at $118 million USD, CAGR from ‘03-‘05 was 143%. Mobile picture sharing reached $90 million USD in 2005, CAGR of 190% between ’03 and ‘05.
Another popular service, mobile instant messaging which allows users to respond to MSN and QQ services using their phones, accounted for another $62.5 million USD in 2005. As mobile payment services like Smartpay and Yeepay become available in China, consumers will only have more reasons to use phones.
Finally, mobile advertising is coming to China sooner rather than later for reasons that I partially outlined earlier in an article entitled “Targeting Chinas Consumers: Focus Media and the Advertising Game” http://biz.yahoo.com/seekingalpha/060917/17041_id.html?.v=1. Companies have struggled with regulations and standards, but when mobile advertising breaks in China it is going to be big.
To take advantage of the VAS sector in China, many investors have been buying Sina (NASDAQ:SINA), Sohu (NASDAQ:SOHU) or Linktone (NASDAQ:LTON) as they provide VAS. However, the volatility of these stocks is quite high for the everyday retail investor.
Linktone’s stock has dropped to $4.75 USD from a 52 week high of $11.57. Sina has been going up and down as it has been a rumored takeover target over the last 6 months. I will write about Sina at a later date. While buying the stocks of VAS providers might bear fruit, it is not for the investors with a weak stomach.
The Real Pot of Gold: China Mobile
In my mind, the best way to take advantage of China’s mobile phone boom is not by buying the stocks of handset makers or of VAS providers. The competition in the manufacturer sector is too high (witness Mitsubishi’s pullback) while VAS providers have volatile stock prices due to rumors. They are also at the mercy of new regulations promulgated by the Chinese Government, which at a moment’s notice, can put a huge dent into their businesses. And, most importantly, VAS providers are at the mercy of China Mobile.
China Mobile takes a cut out of virtually every VAS provider. If a specific sector is too lucrative, China Mobile always has the option of coming in and providing the service themselves. Or they will renegotiate their piece of the pie.
I first ran into this when I was Chief of Research for venture capital Inter-Asia Venture Management. We invested in a wireless instant messaging company called ACL Wireless, which was just declared a winner at Red Herring’s 100 Asia 2006 Conference and was named India’s Fastest Growing Technology Company by Deloitte in 2005. I unfortunately have no stake in the company. When ACL first set up in China, it become obvious that China Mobile was going to take a cut of anything that any VAS offered.
As long as China’s mobile sector booms, China Mobile will benefit. It does not matter what VAS is hot, what VAS provider is doing the best job, or what handset maker is popular, China Mobile will benefit.
I bought China Mobile stock at the late $20s and sold when it hit $34 a few weeks ago. I now do not have any exposure to China Mobile except through the iShares FXI (NYSEARCA:FXI), which is heavily tilted towards China Mobile. China Mobile’s stock now trades at $37.80. The price is a little high for me in the short-run but when it drops again I will probably buy some more.
CHL 1-yr chart: