Is China Mobile worth buying into

Saturday, October 26, 2013

Is China Mobile worth buying into

China Mobile Inc. (NYSE:CHL) has been at the receiving end of some cynical comments regarding its perceived incapability to bring the desired iPhone to its network. Indeed, commentators writing on the Chinese government-run telecom giant also noted that other telecom companies, which have been paying fees for leasing China Mobile's services, are now paying less. 

Image credit: viewstock / 123RF Stock Photo

However, this commentary ignores the simple fact that China Mobile is the dominant player in the Chinese telecom space. Further, its balance sheet and the dynamics of the Chinese market are still heavily in its favor as the following analysis will show. Coupled with its future prospects, these factors make any anxiety regarding the Chinese company's future highly unwarranted.

China Mobile's Unique Market Position

US telecom majors are often considered giants, but China Mobile is a giant of an entirely different level. It commands 63% of the Chinese mobile user base of 1.2 billion, which is far more than that of any telecom MNC we can think of. If that weren't enough, consider the fact that it is run by the Chinese government, and, therefore, gets all the benefits that come with government backing. Though free trade pundits have long debated the pitfalls of such corporate favoritism, it cannot be denied that this has helped the company significantly in the past.

However, it would be wrong to think that the company has risen to its enviable position in the Chinese market on the back of government backing alone. This is what commentators assumed when they argued that the reduction of fees paid by other companies to China Mobile, and the denial of the Ministry of Industry and Information Technology (MIIT) to stand up for China Mobile (and state backed telecom  giants in general) when it complained against a smaller company. 

However, it should be noted that China Mobile has built up the largest and most effective mobile network in China and is rapidly upgrading it from 3G to 4G. These factors make it the popular choice among China's growing mobile subscriber base, and this, more than government backing, helps explain the dominance of the company.

The deal with Apple

Much has been made of the incompatibility of Apple's WCDMA-based iPhone 5C and 5S, and the TDS-CDMA network of China Mobile. However, it may be argued that with the talks making significant headway, there should be no reason to doubt the competence of China Mobile and Apple to come up with a common technological platform. Further, it cannot be expected that iPhones, expensive as they are, will prove to be the dominant factor in China Mobile's future growth.

However, even a 1% penetration, which is reasonable to expect, would lead to a massive growth of customers, given the sheer size of the Chinese subscriber base. This 1% would be customers who use high-end plans, including data plans since these are indispensable when using an iPhone. Hence, the profit per customer would be much higher, and the impact disproportionately large. Hence, even though we can never expect the iPhone sales to drive China Mobile's growth, they won't be trivial either.

A look at the balance sheet

China Mobile has maintained a steady dividend growth rate of 3.87% for the last 3-4 years, giving its investors sufficient reason to trust the company even though it is essentially a foreign company with most of its operations confined to mainland China. Further, the company's revenue growth per year has been a strong 12%, which implies that payout ratio has actually fallen, even though the company has managed to retain a dividend yield of 3-4% per Annum.

The falling payout has, on the other hand, allowed the company to reinvest heavily, and still retain its cash reserves. Finally, it has managed to keep debt under strict control.

The future of China Mobile

China Mobile cannot be expected to grow at the rate of a startup. As with other telecom giants in the Chinese market, the growth rate is largely driven by the growth of the middle class, which demand better services, and gradually shifts over to Smartphones. This helps bring in higher revenue and better profit margins. In case of China Mobile, the telecom giant's sheer size means even a small growth in this middle class segment will cause tremendous progress in terms of numbers. This should be something which analysts often tend to overlook when they argue that China Mobile has no more room to grow.

Secondly, it has made commendable progress as far as upgrading its network is concerned, and this can be expected to provide China Mobile with an even larger proportion of the Chinese market. Finally, the growth in iPhone users will boost the revenue growth of the company, as well. 

Decisions regarding investment in companies that have their vital markets abroad can be tricky. However, one should remember that given the backing of the Chinese government and its sheer size, China Mobile can be considered to be extremely reliable, even in the long-run. When we consider this along with its balance sheet, market dominance and future prospects, China Mobile appears to be a “buy” despite all the negative publicity it has received of late. Indeed, this company is perfect for the investor who seeks stable and growing long term dividend returns. On the other hand, those seeking to lock in profits would be advised to “hold” now since the negative publicity has impacted shares adversely, the effects of which can be expected to last for some time to come.

Author Bio-

Aritra Majumdar is a freelance writer and editor who specializes in writing on Finance and Business. He graduated from Presidency College, Kolkata and is currently pursuing his Masters from University of Calcutta. Apart from his academic learning, his experience in working for financial analysts and brokerage firms in the past, has provided him with a good understanding of the markets in US and India, and of the global financial system in general.  Apart from finance, he is an avid technology enthusiast and regular tech blogger as well.

His email address is

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