China Mobile Is a Back-Door Alibaba Stock Play
A Telecom That Stands to Benefit From the E-Commerce Giant's IPO
By Andrew Bary
Wall Street Journal
May 18, 2014
Wall Street is eagerly awaiting the initial public offering of Alibaba, the Chinese e-commerce giant, but is turning a cold shoulder to a company that stands to benefit from Alibaba's growth—China Mobile.
Bulls argue that China Mobile looks appealing because it has a low price/earnings ratio, a great balance sheet and an opportunity to capitalize on increased data traffic over its network—including e-commerce from Alibaba customers—as it rolls out 4G services this year throughout China.
China Mobile's U.S.-listed American depositary shares sport a 4% dividend and trade at around $49, equal to about 11 times projected 2014 earnings. (Each ADS represents five of the China Mobile shares listed in Hong Kong, where it is the biggest "red chip," or mainland-Chinese company, on the exchange.) The effective P/E ratio is even lower, since China Mobile has $67 billion of net cash (cash less debt) on its balance sheet, roughly a third of its nearly $200 billion market value.
China Mobile is one of the world's largest telecom companies and the leader in China's wireless market, with more than 60% of the customer base. It has $100 billion in annual revenue, 781 million customers and $38 billion of annual pretax cash flow.
The market values China Mobile at about 3.5 times pretax cash flow, making it one of the world's least-expensive big telecoms by that measure. Most trade for six to eight times annual pretax cash flow.
One reason the company's shares trade cheaply is because the Chinese government, which owns 74% of China Mobile and regulates the company, forced it to adopt a homegrown wireless technology for its 3G data service. That has proved inferior to the services offered by the company's two rivals, China Telecom and China Unicom, which are based on international standards. That misstep has cost China Mobile valuable customers who access lots of data.
China Mobile has the opportunity to leapfrog its competitors because it's rolling out 4G services—with about 20 times the data speed of its 3G offering—ahead of China Telecom and China Unicom. Bernstein analyst Chris Lane wrote recently that 2014 could mark the "start of a turnaround" for China Mobile after a disappointing 2013, when net income declined 6%. He carries an Outperform rating and a $67 price target on the U.S.-listed shares.
"China Mobile has been hampered by an inferior 3G network, but the rollout of 4G has the potential to shift that advantage," says Matthew Ring, an analyst at Pzena Investment Management. "And there's incredible downside protection from both the low valuation and significant net cash position." Pzena is a China Mobile shareholder.
There's risk with China Mobile, both from any weakness in China's economy and potential government meddling. But that's offset by a strong business with a cash-rich balance sheet. China needs a strong wireless industry, and China Mobile has to be part of that equation.
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