Invest In This Chinese Telecom Giant
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With 660 million subscribers and counting, China Mobile (NYSE: CHL) is truly a telecom behemoth. Officially the largest mobile phone provider in the world, shares of CHL have returned 13.4 percent year-to-date, outpacing both the telecom services industry and the broader market indices, most importantly the S&P 500 and the Shanghai Composite Index. Despite reports of the Middle Kingdom’s slowing growth (as seen here), CHL has actually improved its financial footprint quite nicely through 2012’s first half and may be cooking up a plan with Apple (NASDAQ: AAPL) to bring the iPhone to its users.
In the first quarter of this year, China Mobile reported a year-over-year earnings increase of 3.5 percent, riding growth in its 3G-user base. On the whole, CHL has grown its revenues by 8.6 percent per annum post-recession, with EPS growth clocking in at 3.9 percent. Despite its sheer size, the company has remained relatively nimble, sporting outstanding operating (28.7%) and net (23.8%) margins that dwarf the industry averages of 12.5 and 4.1 percent respectively.
From an earnings standpoint, China Mobile is trading at a P/E ratio (11.3X) below the industry average (24.8X), China Telecom (NYSE: CHA) at 14.0X, and China Unicom (NYSE: CHU) at 38.9X. Shares of CHL also look particularly discounted in relation to the company’s own 5-year historical average P/E (14.9X). Over the past half-decade, in fact, its earnings have essentially traded on par with those of the S&P 500. This year, they are much cheaper, trading at a discount of 23 percent. These same conclusions can be drawn when looking at price to cash flow ratios, despite the fact that China Mobile has consistently grown its operating (17.1%) and free (41.6%) cash flows over the past three years.
Now, much of the bears’ concerns over China Mobile lie over the fact that it uses a network that strictly runs in SCDMA format – something that Apple’s iPhone does not support. Much to the chagrin of the telecom giant, Apple already has contracts with China Telecom and China Unicom, which both support the smartphone’s WCDMA capabilities. As mentioned above, however, it looks as though both sides are working on an agreement that would bring the iPhone to China Mobile’s 660 million subscribers. If this deal were to pass, it would provide an instant boon to both companies, a scenario that we’ve covered heavily in the past. Though no confirmation of such an agreement has emerged, it would run counter to Apple’s recent focus on China if it did not develop an SCDMA-equipped iPhone.
Dedicated investors would be wise to continually monitor the company’s ongoing deal with Apple, as any positive news could give CHL a pop toward a higher valuation. Even while the deal is still in the works, it would be wise to consider this stock in your portfolio. From a macro perspective, the company is the biggest beneficiary of China’s booming demand for smartphones. In the first quarter of 2012 alone, mobile shopping in this market amounted to ¥10.5 billion, surpassing 2011’s total. While this is not a cut-and-dry guarantee that China Mobile will see its fortunes improve going forward, it is one of the best indicators of this market’s continued prosperity despite a slowing Chinese economy.
By year’s end, analysts are expecting China Mobile to finish with earnings of $5.05 a share, up 3.9 percent from 2011. If this consensus holds, fairly valued shares of CHL should eclipse $75. Even if the stock stays near its current valuation, it will flirt with $60 a share; it currently trades in the $55 range. Wealthlift’s Sentiment Index also rates CHL as a strong buy, with almost all of the community’s users placing an “overperform” rating on the stock.
To recap: China Mobile is currently trading at an abnormally low earnings valuation despite forecasted EPS growth, the company is in talks with Apple to get the iPhone, and it operates in a market that has seen its mobile phone demand skyrocket in 2012. All signs point to a go for this Chinese telecom giant.
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Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. 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.