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4G Launches Telecom Leader Into a New Universe of Growth

March 31, 2014 | About:

Being the largest telecom operator in China implies boasting a one-of-a-kind scale. Such is the case of China Mobile Ltd. (CHL). Its 781.8 million subscriber base not only leads the market domestically, but has also positioned the firm as the world’s largest telecommunications provider, despite being a purely wireless company.

Currently, the firm controls 62% of China’s total wireless market. It is the 2G leader and it also has a 47% share of the 3G market. The Chinese government is its main shareholder as well as its customer and regulator. Moreover, it is CHL’s competitor, since it also controls China Unicom (Hong Kong) Ltd. (CHU) and China Telecom Corp. Ltda. (CHA).

The Colossus

The success achieved by CHL is awesome. Despite the government putting the company at a disadvantage by requiring it to use the inferior technology of home-grown TD-SCDMA, China Mobile has more 3G subscribers than its rivals. Furthermore, its 2G network has the largest base of voice users. This position has allowed it to generate loads of cash flow, which provided the firm with the strongest balance sheet in the telecom industry and one of the best in the business world.

Consequently, the only reason why China Mobile’s economic moat is not wide but narrow is the risk of the Chinese government interfering to even up the distribution of customers among the three companies and to impose the use of its home-grown technologies. Moreover, Chinese law requires all operators to share towers and masts, which prevents the firm from building a superior network.

Evolution

After years keeping its business on the upswing, even when overshadowed by its technological disadvantage, CHL’s government-proof growth power is now poised for a new jump. With the launch of its 4G network all three operators will now be technologically leveled, as they will all use the same standard of TD LTE.

Although this technology is not as common as the FD LTE standard used in most of the world, it is shared by all three competitors and it is also used by Softbank Corp. (SFTBF) in Japan and Sprint Corporation (S) in the U.S., which generates sufficient scale to lower handset and equipment pricing. Also noteworthy, it allows the company to access the popular iPhone, which was not compatible with the TD-SCDMA standard.

A Smart Move

In this scenario, China Mobile has been using its tremendous cash flow to invest heavily in the development of its 4G network. Although the firm is legally limited to make it larger than its peers’, its financial power does provide it with the possibility to build it faster. Thus, the company will earn a temporary advantage that will allow it to grow its subscriber base at a higher rate than its competitors.

The Stock

With a trajectory of sturdy growth and the great prospects opened by the launch of its 4G services, this investment opportunity is surely a very attractive choice.

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China Mobile’s stocks trade at 8.90 its trailing earnings against the industry median of 16.70. And its earnings per share delivered a much higher 7.10% growth compared to the median average of just 1.50%. Its return on equity showcases a healthy 17.87% compared to its rivals’ 12.49% and its return on capital a 30.97% compared to its peers’ average of 23.26%.

Recently, investment guru Joel Greenblatt (Trades, Portfolio) incorporated China Mobile to its portfolio, in accordance with my feeling about the company’s robust growth potential.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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