China Mobile: A Smart Choice for Investors

Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the world, some leaders are unbeatable and China Mobile Limited (NYSE: CHL) is among one of them. The company is facing stiff competition from its competitors especially in 3G market where it has lost a significant market share. It is investing in 4G technology which will surely strengthen it. Let’s take a look at other catalysts that will benefit the company in the future.

China Mobile is the leading telecom operator in China. It provides wireless and related services in Mainland China and Hong Kong. It is the largest telecom operator in terms of market capitalization. The Chinese government holds a 71% stake in the China Mobile.

Market share

The market share of the China Mobile is greater than the market share of its competitors. In February 2013, it held a 64% market share, down from 66% a year earlier. Its competitors China Telecom Corp. (NYSE: CHA) and China Unicom (Hong Kong) Limited (NYSE: CHU) hold a market share of 14% and 20%, respectively. The Chinese market has more than 1 billion subscribers and a penetration rate of 75%, lower than the emerging economies like Mexico and Brazil where the penetration rate is more than 80%. China Mobile is working on its high-speed fourth-generation service to recover the market share. China is capturing opportunities by expanding its network around the globe.

Fundamentals

In the first quarter of 2013, China Mobile has reported a net income of 27.9 billion yuan ($35.8 billion), up from 27.8 billion yuan ($35.7 billion) year over year. Revenue rose 5.7% to 134.7 billion yuan ($173 billion) in the first quarter. EDITDA Margin (Earnings before interest tax dividend and amortization) decreased to 45.4% from 47.6% a year earlier while net profit margin slipped to 20.7% from 21.8%. The company might see a decrease in the profit this year because it is incurring cost for the 4G network. According to Bloomberg, the company’s full year profit is expected to fall 1.8% this year, but next year will be fruitful for the company.

Slipped in 3G Market

China Mobile has launched its 3G service in 2009. In the 3G Market, China Mobile has slipped in a race because of slow internet downloading speed. The company’s 3G market share was 63% in March 2013, down from 72% in 2009. Over the same period China Unicom’s 3G share gained to 21% from 20% and the China Telecom expanded to 15% from 8% in the 3G market. The Reason behind China Mobile’s slow downloading speed is the use of TD-SCDMA technology which limits the speed to 2.8 Mbps.

China Unicom uses a WCDMA technology that provides a download speed of 21 Mbps while China Telecom offers a 3.1 Mbps speed nationwide and 9.3 Mbps in some parts of the country through its CDMA technology. By the start of 2014, it is expected that China Unicom will provide an internet speed of 84 Mbps while China Mobile customers will benefit from 4G network. The decline in China Mobile’s 3G market share will be recovered by its 4G Technology in the future.

4G Technology

Ministry of Industry and Information Technology (MIIT) might issue 4G license by the end of this year. The MIIT has been planning to issue the license on priority basis to telecom operators possessing the TD - LTE technology and then to telecom operators with FDD LTE technology. The aim is to encourage telecom operators to adopt the TD-LTE technology.

After the announcement, China Telecom plans to adopt dual-mode FDD/TDD-LTE technology for its 4G deployment in China. China Telecom’s Chairman Wang Xiaoch elucidated that the dual mode will cover larger areas and expects to reach 200 million subscribers this year, up from 172 million at the end of April 2013. China Mobile is investing heavily in its 4G application network known as TD-LTE and intends to further increase the investment after receiving a 4G license this year.

Rising competition

Competition between China Mobile and its smaller competitors China Telecom and China Unicom is intensifying. China Unicom is rapidly expanding its 3G market share but is still far behind China Mobile. China Unicom will expectantly snatch some 3G market share from the China Mobile due to slow connection speed. China Unicom derives half of its revenue from a mobile service and the remaining half from fixed-line and broadband services. China Unicom uses an Internet access system based on a 4G technology called FDD-LTE. This technology is adopted by the U.S. and European telecom operators.

China Telecom is the third largest wireless operator in China. The market will definitely force China Telecom to offer a 4G service like China Mobile, but China Telecom wants to expand its 3G Market share to recover the 100 billion yuan that it has invested in building the 3G Technology. It gained a significant market share in preceding two years.

Conclusion

The competition for China Mobile is increasing especially in the 3G market where both China Telecom and China Unicom are progressing. Despite this, China Mobile has potential to grow and its early investment in the 4G Technology will surely be beneficial. I recommend investors to ‘buy’ this stock. 


Adnan Riaz has no position in any stocks mentioned. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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