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The Hidden Dragon Within China Mobile – Seeking Alpha

I’ve recently written positively on China Mobile (CHL), for instance by comparing it to Netflix (NFLX) to show how it’s much larger and growing customers faster in absolute terms, while charging a similar average fee per month. China Mobile also is much more profitable than Netflix, of course.

However, I think there’s something within China Mobile which deserves further mention. There’s a hidden dragon within. What is this hidden dragon? It’s China Mobile’s fixed broadband business.

As of June 30, China Mobile’s wireline broadband business already had 93.04 million customers. To have an idea of the scale, this compares to Comcast’s 29 million customers/22.5 million video customers. Furthermore, China Mobile’s broadband segment was adding customers at a clip of around 2.5 million per month. As a result, this segment’s revenues increased 49.8% year-on-year, to reach ~$2.69 billion in H1 2017.

Now, with so many customers it’s evident that the revenues aren’t that large. The reason is ARPU (average revenue per user). It sits at ~$5.24 per month for broadband service, or $5.71 including digital services. This is a massive distance to the $100-plus bills you’re used to see in the US.

However, even when it comes to ARPU things are moving in the right direction. ARPU increased 9.8% year-on-year including digital services. Moreover, since the business is growing so quickly, looking at recent revenues can be misleading. The present yearly run rate for the broadband business already exceeds $6.3 billion. As a result, this business will now start being relevant for the whole of China Mobile, which has ~$110 billion in TTM (Trailing Twelve Months) revenues. A $6.3 billion business growing 40-50% a year will impact a $110 billion business’ growth rate by 2.2%-2.9%. This will be visible since the whole of China Mobile is now growing revenues at 5% year-on-year.

In short, China Mobile is breeding another giant business within its already massive mobile telecom business. In my view, this isn’t yet reflected on the share price.

Some Other Interesting Tidbits

China Mobile’s Q2 had a few other interesting items which deserve mention:

  • As a measure of China Mobile’s scale, China Mobile now has 1/3rd of all 4G subscribers in the world.
  • China Mobile has been very criticized for sitting on a large pile of cash without increasing its dividend. Well, China Mobile increased the regular dividend by 9%, which now gives it a roughly 3.6% dividend yield.
  • On top of this, China Mobile has proposed a one-off special dividend which amounts to an additional 3.7% in dividend yield for 2017.

Conclusion

China Mobile is incredibly cheap (~4x EV/EBITDA), yet now shows sustainable growth. Arguably, China Mobile ought not to trade at a discount to the average stock or even its peers. It ought to trade at a premium, due to its market position and profitability.

More amazing still, China Mobile is now breeding within itself another massive business – providing fixed broadband access. The new business already is so massive and growing so quickly that it will now contribute visibly to China Mobile’s top line growth.

Finally, China Mobile has at least partially addressed the dividend criticism levied upon it.

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.

Additional disclosure: This article was published earlier today to Idea Generator, my subscription service. It was actually meant to be public from the outset, but since China Mobile is also a long idea at Idea Generator, I left it there as well.


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