The Chinese telecom market is poised for major growth as the country’s providers begin rolling out large scale 4G LTE networks. China Mobile (NYSE: CHL) is the dominant telecom provider in China, with cell coverage for 1.2 billion people. While its competitors China Unicom (NYSE: CHU) and China Telecom (NYSE: CHA) were able to begin shifting over to 4G technology before China Mobile, China Mobile has quickly caught up, and its services have scaled well due to their larger user base.
The cell market in China reflects the global trend away from voice services and toward providing mobile data. As seen below, the revenue from data services increased 28% year over year, while total revenue increased 5% on the year. China Mobile has been able to continue to grow total number of subscribers, and has done well in migrating existing customers to 4G and attracting new customers.
Fig. 1: CHL Q3 Earnings Reports, with amounts in RMB. (Source)
Yet considering the YTD behavior for CHL (full size here), the technical analysis is not particularly exciting. Since March, the stock has been testing increasingly lower levels of support. However, despite the overall downward trend on the year, while I would be hesitant to invest now before we see an upward trend gain some traction, I think that this is an opportune time to closely watch this stock.
Fig. 2: YTD relative performance of CHL. Purple dashed line indicates support levels.
The free cash flow for China Mobile also is a very positive indicator for the health of the stock, the price/free cash flow at 23.6. Furthermore, the gross profit margin stands at 59.5%, more profitable than other members of the telecom industry such as AT&T (NYSE: T) at 39.3% and Verizon (NYSE: VZ) at 47.9%. All in all, the fundamentals for China Mobile look healthy, and the company is reasonably poised to continue the growth in its home market that we have seen over the last few years.
Yet the stock does not always reflect the performance of the company, as it seems the stock is undervalued. One reason to be cautious is that the Chinese government is the company’s controlling shareholder. The government also controls its competitors China Telecom and China Unicom. For this reason, I do not believe that China Mobile has a large economic moat, since the government has in the past changed the leadership of the company, and most recently, required China Mobile to use an inferior domestic 3G technology.
However, with the move to 4G, I think that the gap between China Mobile and its competitors has narrowed in terms of the comparable products they can offer. China Mobile managed to grow aggressively with an inferior 3G technology. The disadvantage is negligible with the move to 4G, and its large subscriber base will likely continue to generate large free cash flow.
In conclusion, I’m tentatively bullish long term on CHL due to large potential for growth in 4G LTE customers and data services. The fundamentals are all in place, identifying China Mobile as a good investment as the company is in great financial health. Backed by a 3.6% dividend yield, this stock is worth considering. While over the last year, the stock has failed to generate much momentum, I would encourage interested investors to watch with me on this stock’s future performance.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.