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  • China Mobile Seems To Be A Strong Buy 0 comments
    Oct 7, 2013 1:14 AM | about stocks: AAPL, CM, CU, HSBC, MNP, CHL

    Summary

    China Mobile Ltd. (NYSE:CHL), a government-run telecom operator and service provider in China, has been in the news for a variety of reasons. These include the confusion over the fate of the Apple-China Mobile deal regarding the iPhone and the reduction of fees paid by other telecom operators to China Mobile by Chinese telecom regulator MIIT (Ministry of Industry and Information Technology). This led to a 2% drop in the stock on October 4. However, investors who consider only the short-term woes of the Chinese telecom giant might miss the overall growth story, including its 4G rollout, its market dominance and its dividend yield. These points all indicate that the company's stock is an excellent choice for those who are seeking a stable and growing dividend yield and who have a long-term perspective.

    China Mobile's Unique Market Position

    China Mobile's operations are essentially limited to the Chinese mainland. However, given the fact that the company is run by the Chinese government, it enjoys some of the benefits that come with it. While one may debate whether such benefits are good for the overall market, it cannot be denied that these have helped the company grow steadily. China Mobile accounts for 63% of the 1.2 billion mobile subscribers in China. Other major telecom service providers in China not only have a far lower market share but are dependent on China Mobile for some vital facilities.

    The company has been aggressively upgrading its existing 3G network, such that it is now far ahead of the competition in terms of 4G rollout. This itself helps make the company more attractive compared to its peers.

    The Apple Debate

    Much has been made of the fact that China Mobile uses a TDS-CDMA network, as opposed to WCDMA, which is more popular. It has been argued that since Apple Inc.'s (NYSE:AAPL) iPhones are incompatible with the former, there are reasons to doubt whether iPhones will ever come to China Mobile.

    However, in the opinion of HSBC Holdings Plc. (NYSE:HBC) analysts Tucker Grinnan and Jia Wen, the Apple debate is inconsequential to the real potential of China Mobile. "We continue to be surprised by the widespread view that China Mobile (NYSE:CM) is losing market share to China Unicom (NASDAQ:CU) due to the perceived technology disadvantages of TDS-CDMA. CM is consistently 50%-60% of 3G net adds and the YTD avg monthly net add share is 55%. The primary driver of CM's dominant 3G net adds share is a more aggressive push to shift higher-value 2G subs to 3G. CM continues to control the bulk of the high-end sub base given the lack of mobile number portability (NYSE:MNP). We believe investors should focus on key metrics such as 3G ARPU uplift rather than academic questions over whether TDS-CDMA is better than WCDMA." The HSBC analysts have reiterated their "buy" rating for China Mobile.

    Revenue and Yield History

    China Mobile has maintained a steady dividend growth over the past few years, if one factors in the fact that China Mobile is essentially a foreign company and exchange rates lead to slight oscillations in actual yields. Indeed, the growth in dividend yield has been to the tune of 4-5% per year since 2007. On the other hand, the revenue growth has grown by 12% annually, which implies that the payout ratio has fallen. This has allowed the company to reinvest and build up its cash position while keeping debt under control. While doing all this, the company has still maintained a lucrative 3.87% dividend yield.

    Potential for Future Growth

    China Mobile's potential for growth is excellent for a number of reasons. First, its deal with Apple, though many are skeptical due to the high price of iPhones, may still result in substantial revenue growth. This is because the sheer size of China Mobile's customer base makes even a small penetration with the iPhone (from China Mobile) a large expansion in terms of absolute numbers.

    Second, the growth of the middle class, which has seen larger number of people shift to smartphones, bodes well for the company since a shift to a higher-end gadget automatically means the addition of data plans, which bring in extra revenue. Third, its network upgrade has placed it far ahead of the competition and should attract an increasing number of customers. Finally, in terms of sheer balance sheet math, the company's excellent cash position and revenue growth point to good growth possibilities in the future.

    Investors' Call

    Even though China Mobile may be going through a rough phase due to unfounded fears over the Apple deal and the reduction of fees paid to it by other operators, the above analysis indicates that China Mobile has excellent growth potential. When coupled with its dividend of slightly less than 4%, the company appears to be an excellent choice for investors seeking long-term dividend gains. While the current confusion has left markets jittery about China Mobile, those seeking dividend gains can safely "buy" into the company's stock, or "hold" if they already have some.

    Disclosure: I am long CHL, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: AAPL, CM, CU, HSBC, MNP, CHL
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