An Attractively Valued Chinese Titan
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
China Mobile (NYSE: CHL) is the leading telecom company in China with an estimated market share above 66% and more than 670 million subscribers. The telecom sector in China is plagued with regulatory challenges, but China Mobile is offering interesting growth prospects and an attractive entry point in terms of valuation and dividend yield.
China Mobile is using a less efficient TD technology than the one employed by competitors like China Telecom (NYSE: CHA) and China Unicom (NYSE: CHU) -- this is not a decision the company has made, but a government mandate in order to increase competition in the industry. Regulatory intervention is a serious risk for these kinds of companies, and investors need to be aware of the possibility for further measures that could hurt China Mobile in the future.
On the other hand, none of these regulatory hurdles have stopped the company from running a very profitable business, with operating margins in the 28% zone, well above average levels for the industry. Over the long term, business opportunities look quite interesting since growth in disposable income levels and the rise of the Chinese middle class should provide ample opportunities for expansion.
China Mobile has built a very strong competitive position, and being much larger than its competitors it has the possibility to launch lower priced services because it has lower costs per customer due to its tremendous scale. The company is venturing into rural areas of China, where income levels are lower and mobile penetration is much lower. This kind of strategy doesn't pay very high returns in the short term, but from a long-term perspective the company is gaining dominance over a market with an interesting growth potential.
The company has a very strong balance sheet, and is investing heavily to position itself in 3G and 4G technologies. China Mobile is also working closely with Apple (NASDAQ: AAPL) to bring the iPhone into its network, which would be an important move regarding the competitive scenario.
Both China Telecom and China Unicom are offering the product to their customers, making China Mobile the only company that is not selling iPhones; it is believed that the iPhone 5 will be compatible with China Mobile's technology and hence offered by the company.
The Apple brand is widely loved in China -- sales in mainland China, Hong Kong and Taiwan expanded three-fold to $7.9 billion in the first quarter, making up a fifth of the total figure. Considering the size of China Mobile's customer base and the remarkable success of Apple's products in China, both companies have strong incentives to find a convenient solution to the compatibility problem.
From a valuation point of view, shares of China Mobile look really attractive. The company trades at a much lower P/E ratio than its competitors China Telecom and China Unicom, and its 3.9% dividend yield is not only higher than the yields offered by the other companies, but also a considerable benefit for those looking for income.
There are some considerable risks for investors in China Mobile, especially regarding the regulatory environment, but those factors seem to be already reflected in the company's valuation. From a long term point of view China Mobile offers an attractive entry point in a company with very strong fundamentals and a juicy dividend yield.
acardenal owns shares of Apple. The Motley Fool owns shares of Apple and China Mobile. Motley Fool newsletter services recommend Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.