Is the Time Ripe for China Mobile?

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

The last few years have been pretty brutal for Chinese stocks, posting losses from 2009 to 2011. Partly, this is a result of slowing economic growth that has investors spooked about the health of the world’s second largest economy. However, some analysts maintain that the worst may be behind us for Chinese equities, as the macro economic data suggests that the Chinese economy may finally be recovering. However, as this recovery remains fragile, investors would be perhaps be well advised to stick with large, low beta stocks in order to mitigate risk. One of these Chinese giants is China Mobile (NYSE: CHL).

Company Overview

China Mobile is one of the country’s largest companies, and the world’s largest mobile carrier. It has a massive $234.4 billion market cap and employs around 181,000 people. Based in Hong Kong, it offers a range of telecommunication services primarily in mainland China, serving approximately 700 million customers. The company also markets handsets and devices. The stock has a beta of only 0.13 and offers a handsome 3.3% dividend yield. Importantly, Apple (NASDAQ: AAPL) is currently courting the telecom giant in order to secure a deal in distributing the new iPhone 5. With 3G penetration currently at only 19%, this market could provide a huge growth opportunity for both companies. Breaking into the Chinese market would be a crucial step for Apple, which currently appears to be in a bit of slump. 

Earnings and Cash Position

In the latest earnings report, net income was up 1.3% which came in slightly above the analyst consensus. This isn’t particularly impressive growth, but sales were up 6.2%. Data traffic surged over 60% during the first nine months of the year, and improvement in data services will be crucial for the company to maintain its lead over rivals China Telecom (NYSE: CHA) and China Unicom (NYSE: CHU). It is still in the lead at the moment with a market share of about 65%. In terms of cash position the company looks very strong. It has only about $4.5 billion of debt, and almost $63 billion worth of cash on the books. This enviable cash position should allow them to continue improving their wireless internet network.

Fundamentals and Metrics

With a P/E of 11.72x, the company is trading at a discount to the 14.27x industry average. The price to book is also very reasonable at 2.15. The operating margin is an impressive 28.37%, and the return on equity a solid 19.56%. The stock certainly looks cheaper than that of its main rivals. China Telecom currently trades at 18.4x earnings and China Unicom at a rather high 43x earnings. Moreover, both competitors have a substantially lower operating margin, although their stocks trade close to book value.

Bottom Line

Based on the favorable macro-economic data coming out of China at the moment, many analysts believe the worst may be over for the Chinese economy. For those looking to get back into this economic powerhouse, China Mobile may be an interesting option. As the world’s number one telecom provider, the company offers stability and resilience during uncertain times, as well as a nice dividend. Currently undervalued compared to the industry and its main competitors, China Mobile could be a good play on Chinese economic recovery and consumer spending. 


DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and China Mobile. Motley Fool newsletter services recommend Apple. 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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