Seeking Alpha
Activist investor, special situations, long/short equity
Profile| Send Message|
( followers)  

Introduction:

Founded in 1997 and headquartered in Hong Kong, China Mobile Limited (NYSE: CHL) is the largest mobile telecommunications and related services provider in mainland China with a greater than 70% market share. As of the end of 2010, CHL had 584 million individual customers; this is a 62 million net increase from the end of 2009 and the total number of customers is 1.9x the entire United States population.

In addition, unlike the in United States, mobile telecommunications is a rapidly growing industry in China as mobile telephone service is rolled out to new territory, high-speed 3G networks are only currently being established, and additional services, such as mobile internet and mobile payment, are deployed. While China Mobile Limited’s main listing is in Hong Kong, United States investors can invest in this company via the NYSE-listed ADR (American Depositary Receipt), which basically trade like normal company shares in the U.S. CHL is currently valued at 10.5x P/E (ttm), 4.2x Enterprise Value/EBITDA (ttm), and has a 3.5% dividend yield, which is quite compelling relative to its global trading peers.

Business Overview:

China Mobile offers various services, including local calls, domestic and international long distance calls, intra-provincial roaming, inter-provincial roaming, and international roaming services; and voice value-added services, including caller identity display, caller restrictions, call waiting, call forwarding, call holding, voice mail, and conference calls. In 2010, voice usage increased 18.6% on a year-over-year basis. CHL also engages in data businesses, which include short message services (SMS/texting), wireless application protocol, and multimedia messaging services, as well as color ring services that enable users to customize the answer ring tone from various selection of songs, melodies, sound effects, or voice recordings; and provides various data products, such as Java applications, IVR, and PIM.

In addition, the company offers agricultural information services; telecommunications network planning, design, and consulting services; roaming clearance services; technology platform development and maintenance services; and mobile data solutions, and system integration and development services, as well as operates a network and business coordination center. In 2010, value-added business revenue increased 15.2% and the mobile internet access business revenue increased by 49.4%.

As of the end of 2010, CHL had over 20 million high-speed 3G customers and provided 3G coverage in 656 major cities in mainland China. China Mobile has significant revenue growth opportunities derived from the rapid growth in mobile data traffic. CHL is positioning itself as a “smart pipe” to also provide services and added value for customers. The company believes there is huge market potential for 3G networks as the scope of mobile communications in China rapidly expands to include “human to machine” and “machine to machine” transmissions, with over 1 billion potential access points. China Mobile will be at the center of this new industry ecosystem because it provides both the “pipes” and applications to bring a “Smart Plant” marketplace to fruition.

China Mobile’s “Smart Plant Ecosystem”

China Mobile has recently launched two important joint-ventures which should help continue its rapid growth. First, in March, China Mobile launched a joint-venture with Nokia Corp (NYSE: NOK) and Siemens AG (NYSE: SI) to develop, test, and deploy a next-generation TD-LTE networks in mainland China. TD-LTE is an even faster mobile internet technology than current 3G service and will provide additional opportunities to develop a “Smart Plant Ecosystem.” Critically, the Ministry of Industry and Information Technology of the People's Republic of China has approved the TD-LTE trials and has indicated it views increased mobile communications and technologies to be a crucial part of China’s economic development.

Next, on April, 1, 2011, SK Telecom (NYSE: SKM), South Korea’s largest telecommunications company, announced a partnership with China Mobile to jointly develop new wireless technologies. Specifically, SK Telecom will help China Mobile develop Android-based solutions for smartphones and tablet devices based on its experience in the highly-advanced South Korea mobile communications market.

As part of the agreement, the two companies will jointly research low-cost network software platforms, collaborate on application store capabilities, and work together to enhance mobile application store services.

CHL’s Unrivaled Customer Base and Continued Strong Growth

CHL’s relentless focus on customer service has resulted in continued customer growth and the largest total subscriber number of any global mobile communication firms.

While mobile voice communication is becoming a more mature business in China, it still exhibited strong growth fundamentals in 2010 as both total voice usage and revenue increased on a year-over-year basis.

In 2010, China Mobile’s value-added data businesses, a key part of the mobile internet ecosystem, had excellent growth as new products were rolled out and mobile internet began to achieve critical mass.

CHL’s 2010 Mobile Internet Access Revenue increased 49% versus 2009 and total mobile interest access increased by a shocking 112.3%.

Because of China Mobile’s significant market share in the Chinese mobile communications market, it is able to capture significant economies of scale, which allows it to earn attractive returns while continuing to provide great service and value to customers.

Financial Overview – Consistent Growth in Operating Performance

Despite exponential customer growth, China Mobile remains focused on providing strong financial returns for shareholders. In 2010, total operating revenue increased 7.3%, EBITDA increased 4.5%, and EPS increased 3.9%

Fortress Balance Sheet, Strong Capital Structure, and Sustainable Dividend

CHL has a healthy and solid capital structure, which should allow it to easily fund is capital expenditures investment program and continue paying a healthy dividend. This fortress balance-sheet will also allow CHL to potentially purse opportunistic acquisitions and investments to continue its outstanding growth trajectory.

Direct Competitor Comparison:

Relative to China Mobile’s direct competitors, the company is a clear market leader. CHL’s dominate market position should allow it to continue to generate strong margins relative to its significantly smaller competitors, which mainly focus on lower-margin consumer accounts.

USD, $ billions

China Mobile Limited

China Telecom Corp.

China Unicom Limited

Symbol

CHL

CHA

CHU

Market Cap:

$189.2

$52.3

$43.2

Revenue (ttm):

$74.2

$33.6

$26.2

Gross Margin (ttm):

84.0%

62.3%

63.0%

EBITDA (ttm):

$35.8

$11.6

$9.1

Operating Margin (ttm):

31.6%

11.0%

3.0%

Net Income (ttm):

$18.3

$2.4

$589.2

EPS (ttm):

$4.51

$3.00

$0.24

P/E (ttm):

10.5x

21.5x

76.4x

P/S (ttm):

2.6x

1.5x

1.6x

Qtrly Rev Growth (yoy):

6.8%

6.8%

NM

Global Trading Comparables:

Relative to China Mobile’s global trading comparables, the company is attractively valued as it is currently trading at 10.5x P/E, 4.2x Firm-Value/EBITDA, and has a 3.5% dividend yield. In addition, because China’s mobile telephone penetration rate is still significantly below other markets, the company’s future growth potential is significantly higher.

USD, $ billions

Symbol

Share Price

Market Cap

P/E

FV/EBITDA

DivYield

Verizon Communications

VZ

$37.72

$106.7

41.9x

4.4x

5.2%

Vodafone Group

VOD

$29.08

$153.3

8.3x

8.7x

3.1%

France Telecom

FTE

$22.86

$60.6

8.7x

4.5x

5.7%

NTT DOCOMO

DCM

$17.55

$73.0

11.9x

3.8x

3.2%

AT&T

T

$30.71

$181.5

9.2x

6.3x

5.6%

BT Group

BT

$31.43

$24.2

12.5x

4.7x

2.3%

Median

$89.8

10.5x

4.6x

4.2%

Key Risks:

We believe the key risks relative to China Mobile include:

  • Intensifying price competition as mobile penetration matures
  • Potential cross-sector competition as more merging technology companies enter the mobile market
  • Continued exponential growth of mobile internet could potentially strain the carrier network and available bandwidth

Conclusions:

China Mobile Limited (NYSE: CHL) is the largest mobile telecommunications provider in mainland China with a greater than 70% market share and has a bright outlook because of continued wireless penetration and growth of mobile internet services. The CHL leadership team has a proven track record of leveraging significant economies of scale to deliver continued financial growth. Based on current valuation metrics, China Mobile appears to be a compelling opportunity for investors.

Source: China Mobile: Compelling Value Opportunity