China Mobile's Moat: Worth a Swim?

There has been some big news in the US wireless arena lately. Verizon (VZ) and AT&T (T) won the auction of some new wireless spectrum, Google (GOOG) did not win the spectrum (see the details in the following NY Times article). Do you know how much Verizon paid for the new spectrum? $9.6 billion. Imagine a similar scenario in China: how much does the 3G license cost in China? As far as China Mobile (CHL) (and China Unicom and Telecom) is concerned, it's null, zero, no cost.

What? You must think this is crazy. How come the government gives away the license for free? Well, the No. 1 reason is the government is the biggest shareholder of all those big wireless/telecom companies. If they charge a big fee, essentially they are switching money from their left pocket to their right pocket, so why bother.

Moat analysis
What does China Mobile (CHL) have going for it?

1) A top 10 Chinese global brand, which consists of 3 sub brands: GoTone/quan qiu tong (white collars), shen zhou xing (everyone) and dong gan di dai (mobile internet).

2) A national distribution channel, including rural areas.

3) A network (behind the scene) - I got a signal when I was in Jiu Zhai Gou (May 2005).

4) Management: Wang Jianzhou and his team has experience both in industry and the government. Note the latter one is also important, because in China government has the final word on a lot things (such as giving away spectrum or 3G licenses).

The potential downside

The biggest worry is the government recently made China Mobile pick up the slack for the deployment of the domestic brewed 3G standard TD-SCDMA (Wiki). Some people worry CHL will waste lots of money on TD/3G deployment, without consumers' ultimately buying in. Because in China consumers always want the best (usually not the domestic) technology. This is evident in the popularity of foreign products in cars, handsets (Nokia, Samsung), MP3 players (Apple), etc.

Spam SMS

A portion of SMS sent everyday is spam. This has been reported in the Focus Media wireless division's recent spam SMS scandal, in which millions of spam messages were sent to consumers. China Mobile and vowed to stay clean of all this. But we know they make money even from spam messages, so there is a conflict of interest here.

Disclosure: Long CHL

Comments

[James Lewis:]

If the market in Hong Kong is strong or the Shanghai market strengthens and the perception shifts again to the buying China trade. What better stock to be long of. Unlike other 'STATE OWNED' companies the subsidisation of personal goals is really quite minimal. Who knows they may even try to sell 3G standard TD-SCDMA to some poor developing country eventually.

Also China Mobile has an almost Monopoly (not really even a Duopoly) over the Chinese Market and they are lots and lots of people. The culture is to use mobile phone (ranging from Migrant workers wanting to keep in touch with freinds all the way up to the chinese Models wanting to look safisticated and lets not forget Chinese Business People that like to shout orders down the phone in public to show 'face'). Not only that China Mobile has a better network of shops that any Bank and are making good money. Even though there reporting is for sure very suspect. Evern the ADR.

Its a good play if people want to trade 'the buy China trade'

The downside is the Government will use this company to maintain employment levels at any cost in the event of a downturn. However I dont see no downturn, quite the opposite. All I see is wage differential getting bigger and middle/upper class getting richer through asset inflation appreciation. No doubt there will be some more opression of the poor to limit political risk. But whats new?

2008 Apr 12 08:50 PM

[J.D:]

It's just like buying into a Chinese government ministry. Think about it and you'll soon find better uses for your cash. Chinese government enterprises are generally motivated by the big payoff for their party bosses. There's no plan for privatization or to truly cede control. So how do you value that without simply ignoring it?

2008 Apr 13 09:17 AM

[darkduck:]

china mobile should focus more on the users. In my apartment, I have very low china mobile signals. I call china mobile hotline 3 times since this March. Every time they make a record and say they will investigate it , but no result or feedback to me. It is not a customer-oriented company; if china open the market to foreign mobile company, china mobile will go to hell, I guess.

2008 May 10 12:39 AM