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China Mobile: Depressed Price Presents Dividend Opportunity – Seeking Alpha

The Stock

China Mobile (CHL) is a Chinese state-owned telecommunications corporation that provides mobile voice and multimedia services through China.

The stock has fallen over 40% since its 2015 peak, leaving it undervalued, providing an attractive opportunity for investors interested in both the potential capital gains and more importantly its relatively high dividend yield.

The massive drop in price was mainly due to the slowing of revenue growth in China Mobile’s voice segment (which mirrors the general trend across China’s other telcos). While the voice segment user base will continue to grow, the segment’s revenue will likely continue to trend lower due to substitution by OTT services and increased competition:

(Source: Forbes)

Financial Performance

In the first half of 2017, the group’s operating revenue recorded growth of RMB388.9 billion, up by 5.0% over the same period last year. Telecommunications services grew to RMB348.0 billion, up by 6.9% y/y. The focus by management on its growth strategy, which required increased investment spending on the group’s non-voice segments, has achieved initial success, with the improvements in the data segment leading to strong growth with revenue at RMB250.5 billion (+28.4% y/y). Wireless data reached RMB187.7 billion, up by 33.2% over the same period last year, and is now the largest source of revenue for the Group. Revenue from wireline broadband services reached RMB17.9 billion, up by 49.8% y/y. Revenue from applications and information services rebounded to RMB30.4 billion, up by 12.1% y/y.

In the first half of 2017, the group’s operating expenses were RMB320.9 billion, up by 5.5% y/y (82.5% of operating revenue). Capex increased due to investment in improving 4G and wireline broadband network quality and coverage. Charges incurred for use of mobile towers was RMB18.4 billion, up by 22.1% y/y. Due to intensifying domestic competition, marketing and selling expenses increased by 10.3% to RMB34.1 billion. Employee benefits and related expenses for the first half of 2017 were RMB40.7 billion, up by 5.9% over the same period last year, representing 10.5% of operating revenue.

Throughout 2017, management has focused on cost reduction and improving operating efficiency. EBITDA increased by 4.7% over the same period last year to RMB140.7 billion, and the group’s EBITDA margin was 36.2%.

As we can see, while revenue growth has slowed, it remains stable, meaning the stock price has fall since mid-2015 is overkill, as the company has several avenues of growth to capitalize on moving forward:

ChartCHL data by YCharts

(Source: Forbes)

Industry Valuations

PE Ratio Price/Sales Ratio Price/Cash Flow
China Mobile 12.42 1.89 5.42

China Unicom

95 0.83 2.83

AT&T (For reference)

18.14 1.46 6.15

Verizon (For reference)

12.52 1.61 6.12
Vodafone plc (For reference)
N/A 1.35 7.05

As we can see, despite the potential for growth into the future presented to China Mobile through the socio-economic changes occurring in China (mainly its growing middle class), its current depressed price leaves China Mobile at a highly attractive valuation in comparison to the industry average.

Growth Opportunities

The potential for future growth in revenues/profitability comes from China Mobile’s non-voice business segments, including positive signs from increasing numbers of users subscribing to higher margin wireless and wired data services (a trend that is expected to continue accelerating), increased corporate business growth and maintaining its strong relationship/ownership by the Chinese government gives the company a stable competitive platform moving forward with little chance of serious negative government intervention into the companies’ future operations.

Network Investments/4G Expansion

China mobile has been striving to strengthen their network infrastructure and capability. In the first half of 2017, their total number of 4G base stations increased to 1.65 million, making China Mobile’s 4G TD-LTE (Time Division Long Term Evolution) network the largest in the world. With a net addition of 58.62 million 4G customers, the total number of 4G customers has now reached 594 million, and the 4G penetration rate of existing mobile customers has achieved 69% in the first half of 2017. The average handset data traffic per user per month for 4G customers reached 1.4GB, and total handset data traffic increased by 107.5%. Management expects continued growth in higher margin data use:

Through the strategic integration of our premium 4G network and service applications, we aim to grow the number of 4G customers to in excess of 630 million and VoLTE customers to over 150 million by the end of this year.
(Source: China Mobile 2017 Results Announcement)

(Source: Forbes)

Wired Broadband

China Mobile’s wired broadband business has experienced strong market share growth throughout 2017. The customer base rapidly expanded with a net addition of 15.42 million, bringing the total number of wireline broadband customers to 93.04 million. The company has seen an increase in customers subscribing to services with higher bandwidth (and higher margin). Specifically, customers opting for products with bandwidth of 20Mbps or above accounted for 87.5% of total wireline broadband customers, representing an increase of 10.6% y/y. Revenue from the wireline broadband business has increased by 49.8% y/y to reach RMB17.9 billion and is now a key component China Mobile’s revenue growth. The upgrades in network quality/bandwidth has facilitated the rapid development of home digital services. In the first half of 2017, the number of Mobaihe (a Chinese digital set-top box) customers reached 38.59 million, a net increase of 15.79 million from 2016.

(Source: Forbes)

Corporate Business Growth

Management has made a concerted effort to expand their B2B portfolio:

We again expanded our business with corporate customers in the first half of 2017. The concerted effort has yielded positive results in terms of both customer base and revenue. We served more than 5.90 million corporate customers and achieved a 25.3% year-on-year rise in corporate telecommunications and informatization services revenue, accounting for more than one third of the total market. The Company has established a business structure that further optimizes revenue generation, with the data dedicated line and IDC (Internet Data Centre) businesses leading the growth, recording increases of 38.4% and 97.1% respectively year-on-year
(Source: China Mobile 2017 Results)

This B2B growth will also be assisted by the recent announcement of a combined effort with Nokia’s (NYSE:NOK) Nuage Networks in creating a software-defined networking platform for a public/private enterprise cloud offering. The new Nuage services will allow China Mobile to expand its offer to include new public, private and hybrid cloud services.

Chinese Government Ownership

For better or worse, the controlling shareholder in China Mobile is the Chinese Government. This does not present a straightforward positive or negative narrative to investors, as the actions by government officials have been inconsistent. It is important to note that the government also controls China Mobile’s competitors, China Telecom and China Unicom. Management is often rotated between the top telecoms in order to (attempt to) maintain an even competition, which has in the past forced China Mobile to use inferior domestic networks:

Other operators that have been granted permission to refarm a valuable spectrum and begun to enhance their 4G networks will strive to increase their shares of the customer base and data traffic by all possible means, posing a challenge to our 4G market leadership.
(Source: China Mobile 2017 Results)

Dividend Distribution/Capital Management

For several years, China Mobile has maintained a steadily increasing dividend distribution policy, including special dividends when circumstances allow:

Payout Amount Ex-Dividend Date Record Date Pay Date ▼ Payout Type Frequency
$1.8431 2017-08-29 2017-08-31 2017-10-10 Special N/A
$0.9348 2017-08-29 2017-08-31 2017-10-10 Regular Semi Annual
$0.7165 2017-05-31 2017-06-02 2017-07-10 Regular Semi Annual
$0.8639 2016-08-30 2016-09-01 2016-10-11 Regular Semi Annual
$0.6934 2016-05-31 2016-06-02 2016-07-05 Regular Semi Annual
$0.8855 2015-09-02 2015-09-04 2015-10-13 Regular Semi Annual
$0.8010 2015-06-02 2015-06-04 2015-07-10 Regular Semi Annual

(Source: Telegraph UK)

Management has reiterated their commitment to the dividend consistently, and the stocks balance sheet is healthy enough to sustain this into the foreseeable future:

(Source: Yahoo Finance)

China Mobile holds a good amount of cash with little to no (reported) debt. As this is a company with strong ties to the Chinese government, reported figures should be taken with a grain of salt. Accounts payable compared to net receivables is quite skewed, but China Mobile’s balance sheet is healthy enough to take on enough debt in the future in order to meet the capex requirements for 5G networks in the future and ensure dividend stability moving forward.

(Source: Yahoo Finance)

Group revenue has been steady since 2014, reflecting the slowdown in the voice segment; however, as discussed, the growth in China Mobile’s other segments will return the group’s revenue to growth over the next 3-5 years.

Conclusion

As we can see, despite the slowdown in China Mobile’s voice segment, all other major segments are continuing expansion y/y, and are expected to continue to do so into the foreseeable future. The socioeconomic tailwinds provided by the increasing number of Chinese middle-class population using higher-margin products will continue to drive growth into the future, and the stock’s recent heavy falls provide investors an opportunity to enter a value position today.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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