China Mobile: Stability At A Fair Price
Summary
- China Mobile is looking like a great buy right now with its TTM P/E sitting at an enticing 9.7x and its well-covered dividend yielding 6.2%.
- The stability of earnings and dividends is quite nice for investors if purchased at the right price and the current price looks right.
- The company's leading position in the Chinese telecom space along with its low leverage make the company a good defensive pick.
China Mobile (NYSE:CHL) is looking like a great buy right now with its TTM P/E sitting at an enticing 9.7x and with its well-covered dividend yielding a solid 6.2%. The company's leading position in the Chinese telecom space along with its low leverage makes the company a good defensive pick. Best of all, this critical infrastructure asset is currently trading at a price of only 0.95x book value.
Data by YCharts
Introduction To The Company
China Mobile is not only the leading service provider in mainland China, but is also claims to have the world's largest network and customer base. With total assets of $228.7B at today's exchange rates, it is easy to see how its network can support 950 million mobile customers and 187 million wireline broadband customers. As is the case with most Chinese companies, the government is a majority stakeholder of this national asset with 72.7% ownership of the company.
Profitable And Growing Book Value
China Mobile's dominant position in the country's oligopoly of providers, including China Unicom (CHU) and China Telecom (CHA), has provided the company with good returns over the past decade. China Mobile has been able to achieve an average return on equity (ROE) and return on invested capital (ROIC) of 14.3% and 12.8%, respectively, since 2008. This level of profitability is around my rule of thumb of 15% ROE and above my 9% ROIC rule of thumb, allowing me to be confident that, in my opinion, the company is able to maintain its intrinsic value over a business cycle.
Source data from Morningstar
It should be noted that returns have steadily decreased over the past decade and while ROIC still remains above my 9% rule of thumb, the company's competitive moat seems to have diminished. The decreasing profitability in percentage terms though needs to be viewed alongside the relatively flat net earnings and dividend figures as can be seen below. The stability of the earnings figures almost makes it seem that the Chinese government is pleased enough with the company's net income where it stands and might have other stakeholders in mind (i.e., the customers). That being said, the stability of earnings and dividends is quite nice for investors if purchased at the right price.
Source data from Morningstar
A Couple Thoughts On Government Regulation
It is clear from the chart that returns have slowly been declining at the company and it looks as if the moat might be disappearing or at least becoming smaller. Most of this in my opinion can be linked to government regulations on telecom service providers such as the cancellation of long distance charges or the caps on data fees. This type of regulation is not unique to China however, as many other countries establish government bodies to regulate an industry which is naturally prone to monopolies due to its high fixed asset operations that produce a non-exhaustive commodity product. However, due to those same facts, it can also be a lucrative business to be in if you are an established player with a big budget. And thus regulators are needed to ensure customers are not being overcharged for what is next to an essential service these days.
Another interesting government interference over the past decade has been when they endorsed a merger of the three major providers of tower assets back in 2014. At the time, China Mobile had the majority of towers in the country and in my opinion this has greatly reduced the economic moat that China Mobile would have if they still solely owned the majority of telecom towers in the country. But once again, some type of network sharing is mandated by many governments through efforts such as mandatory wholesale pricing to spur competition of the incumbent players.
With all this being said on government regulation, it would still be hard to imagine the Chinese government (as the majority shareholder) enforcing many more extensive consumer-friendly regulations that might force ROIC below the company's cost of capital. Returns do look to have been stabilizing in the past couple of years in a sign that the government may have struck a balance between consumer and business needs.
Next To No Debt... Or Share Buybacks Though...
As could probably have been noticed by some analytical readers when I mentioned the similar ROE and ROIC of the company, the financial leverage being employed in the capital structure is negligible at 1.48x at the end of 2019. This is especially low for a capital-intensive business in the telecom space and for comparison, AT&T (T) and Verizon (VZ) had financial leverage of 3.07x and 4.89x, respectively, at the end of 2019.
Source data from Morningstar
Unfortunately, China Mobile does not include share repurchases in their capital budget so the current 6.2% dividend yield is all the cash returns that investors can expect. On the plus side though, the company is not issuing shares for acquisitions or even paying management share-based bonuses to a significant amount. Their share count has only increased at an average 0.05% a year over the past decade.
Conclusion
China Mobile's valuation looks attractive at 9.7x TTM P/E and a 6.2% dividend. Government regulation certainly looks to have taken a bite out of the company's profitability over the past decade with ROIC falling from mid 20% to around only 9%. However, it would be hard to imagine the Chinese government (as the majority shareholder) enforcing more extensive consumer-friendly regulations that would force ROIC below the company's cost of capital. The stability of earnings and dividends seen at China Mobile is quite nice for investors if purchased at the right price, and 9.7x TTM P/E looks like a pretty fair price in my opinion.
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Analyst’s Disclosure: I am/we are long CHL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am long CHL with an average cost base of $34.89.
Disclaimer: While the information and data presented in my articles are obtained from company documents and/or sources believed to be reliable, they have not been independently verified. The material is intended only as general information for your convenience, and should not in any way be construed as investment advice. I advise readers to conduct their own independent research to build their own independent opinions and/or consult a qualified investment advisor before making any investment decisions. I explicitly disclaim any liability that may arise from investment decisions you make based on my articles.
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Comments (10)
Five yesterday ago stock was at $60 has declined each year. Secondly they are not generating enough cash to fund dividend.
