China Mobile: Ready for an Upsurge

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

China’s economy might be growing at a slower pace than before, but the growth expected is still 5% plus. It is due to these growth estimates that China is expected surpass US as the largest market for smartphones. The country is expected to see an increase of nearly 8% in the global market share of smart phone sales, by the end of the current fiscal year. This doesn’t come as a surprise, as the per capita income of the world’s largest populated country is gradually increasing, and the advancements in technology are bringing the prices of smartphones down.

China Mobile (NYSE: CHL) which is the world’s largest telecommunication network enjoys nearly 700 million subscribers.  The company with a market cap touching $220 billion is one of the largest businesses in the world. China Mobile is based in China, and enjoys 70% of the domestic telecom market share. Its competitors China Unicom (NYSE: CHU) has a 20% share and the rest 10% goes to China Telecom (NYSE: CHA).

The telecom network of the company is based on 3G technology which is not new in any regard. It should be noted that the 3G penetration is only 18% and the adoption of the technology is still in its early phases. With the growth in number of smartphones in the country, more users are shifting to the 3G network. As of August, it was reported that China Mobile has 72 million 3G subscribers, which were not even 10% of its total number of subscribers.

China Unicom, one of China Mobile's competitors, has a total of 227 million subscribers out of which there are 63.7 million 3G subscribers. The 3G penetration amongst its subscribers stands at 28% which is way above China Mobile’s.

Up till now the competitors of China Mobile, were at an advantage as the world’s largest telecom company offered only 3G services. To reclaim its stronghold China Mobile recently announced that it would be launching 4G LTE services by 2013 after which, smartphone users won’t have to switch their networks to enjoy seamless download speeds.

In a bid to expand its data hungry user base, it was recently announced that China Mobile is in talks with Apple to release iPhone 5 with China Mobile's service contract in the country. Due to the announced technology upgrade to 4G LTE, the deal between Apple and China Mobile could actually go through. Eventually this deal is expected to yield a massive increase in iPhone sales, primarily because of China Mobile’s extensive reach in the country along with a massive subscriber’s base. China Mobile can expect a rapid increase in 3G adoption by its 2G subscribers, due to the reputation of the premium smartphone manufacturer.

Also telecom companies in order to compete in the market give subsidies under contracts on cell phones, to its subscribers. After the contract expires, the user has the choice to switch or stay with the service provider. If the user decides to stay, it translates into added revenues as well as continued profits for the telecom company. In order to beat the competition, the management at China Mobile announced that it would be revving up the subsidies from the current $1.9 billion to $4.1 billion, which is massive 215% increase. The company has cash reserves in excess of $58 billion, which would ensure that the increased subsidy won't create a strain on the company's operations.

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The comparative stock performance of the three companies shows that China Mobile has been the star performer YTD.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>ROI</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>Net Profit Margin</p> </td> </tr> <tr> <td> <p>China Mobile</p> </td> <td> <p>18.77%</p> </td> <td> <p>4%</p> </td> <td> <p>23.3%</p> </td> </tr> <tr> <td> <p>China Telecom</p> </td> <td> <p>5.49%</p> </td> <td> <p>18%</p> </td> <td> <p>6.02%</p> </td> </tr> <tr> <td> <p>China Unicom</p> </td> <td> <p>2.07%</p> </td> <td> <p>54%</p> </td> <td> <p>2.18%</p> </td> </tr> </tbody> </table>

On comparing the financial metrics of the three telecom companies, we can notice that China Mobile has the lowest debt/equity ratio. The company also has the highest returns on its investments and enjoys the highest net profit margins.

In my opinion, the introduction of the new technology China Mobile could change the game altogether. Most data hungry users would prefer to be the world's largest telecom service provider to enjoy uninterrupted connectivity and it is due to all the above mentioned compelling reasons, that I have a foolish buy rating for China Mobile.


PiyushArora 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.If you have questions about this post or the Fool’s blog network, click here for information.

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