Catalyst: Multiple expansion on stable Chinese economy, wider data adoption
Current Price/Target Price (upside %): $45.76 $53.40 (16.7% upside)
Company Description: China Mobile provides mobile telecommunication and related services in China and Hong Kong. CHL has the largest subscribed base in the world (770mn).
Opportunity/Situation: Recent share price fall on disappointing YoY reported earnings
Consensus: Sell (5) | Hold (15) | Buy (8)
My View: China bears are gaining steam in the wider investment community. While China’s rebalancing of its economy from export/investments to consumption will slow growth, CCP leadership is managing the landing well. Last month’s default of solar-company Chaori raised cries that China’s “Minsky Moment” had come. In an effort to manage the mini-crisis, the government has taken steps to stimulate the economy (eg. infrastructure spending, potential reduction in reserve ratio). In the event of a larger banking crisis, it’s important to remember that China is a global net creditor with plenty of ammunition to recapitalize banks and finance losses to stabilize the economy.
On the corporate level, China Mobile’s shares recently fell on news that YoY earnings had decreased for the first time in a decade. This earnings drop is largely due to CHL’s capex on 4G infrastructure and increased subsidy expense to attract new customers. At present, only ~25% of CHL’s 770mn subscribers use data and CHL has only captured 28% of the Chinese 3G. The company is well positioned to be the leader on migration to 4G. This is case of short-term pain for long-term gain.
In this context, I believe China Mobile’s multiples are overly discounted on uncertainty over China’s economy despite the enormous opportunity for CHL to capture next-gen users. For a country with yawning income inequality, easy access to the internet is a cheap alternative to other sources of entertainment (eg. vacations, popping bottles) that most Chinese can not attain; this is particularly important as a Chinese slowdown will greatly affect the household sector. The smart phone is becoming the most popular portal to access said internet, which the CCP is ok with as long as it still tightly controls the information flow (which it does).
1) Non-catastrophic re-orienting of Chinese economy will increase investor confidence.
2) CHL’s deal with Apple will make it the Chinese hub for the release (likely Fall 2014) of highly anticipated Iphone 6. New IPhone to have larger screen, appealing to Chinese taste for “Phablets”.
3) Release of Wechat competitor that will come preloaded onto CHL phones. On the other end of the cost spectrum from Iphones, CHL is flooding market with $100-$150 data-equipped smartphones.
4) As data adoption…