With over $100 billion in revenue from its massive subscriber base, a $75 billion cash pile, a tidy 5% projected dividend yield and the stock sitting below $55 a share, China Mobile (CHL, Financial) won't have to grow much in the next five to 10 years to beat the performance of the S&P 500 as a whole.
Anyone going to stop using your cell phone anytime soon?
Didn’t think so. In fact, mobile phone usage is only going to continue to increase around the world. For how long is speculation, but if Warren Buffett (Trades, Portfolio) is placing massive confidence into Apple (the world’s most valuable mobile device maker) with 11.63% of Berkshire Hathaway (BRK.A, Financial)(BRK.B)'s investable assets, then it’s a safe guess the market will be around for years to come.
Last week, China announced that it would license virtual telecoms, including those with foreign investment, allowing operators to lease and re-sell capacity from existing network owners China Mobile, China Telecom and China Unicom.
Until now, the country has been slow to open the telecommunications market and the government has stated that there will be no limit on the number of licenses handed out. Competition is good for the market and should ultimately be good for China Mobile.
With more than 887 million customers, China Mobile is the largest wireless phone company in the world, by a long shot. The company also has over 112 million broadband users, up from 80 million just last January.
It’s accomplished so much despite major technological handicaps imposed by China, and continues to grow in the face of strong competition. Since 2007 it has more than doubled sales and book value, but has struggled to produce higher earnings due to the need for heavy capital spending to continue scaling the user base.
Even though cell phone and internet providers are going to be around for many decades to come, the cost of services may become relatively fixed like other utilities. While it’s easier to switch or get rid of cell phone providers than power companies, the desire for increased internet connection speed will only continue to push recurring fees for industry participants. The habit is ingrained now. So, unless there is some real mis-management at China Mobile, I don’t expect to see them go out of business.
What I’m really curious about going forward, and have been for some time, is whether the Chinese government will ever allow the yuan to move higher versus the dollar. This would cause some issues worldwide for other countries who rely on China for their goods. However, as China’s exports as a percentage of GDP continue to decrease, the logical question is why not?
If the CNY simply moved to a quarter on the dollar, Chinese stocks listing on foreign exchanges would explode in value, possibly even at home as well. If that happened, China Mobile would still generate around $750 billion to 800 billion yuan, but instead of $100 billion, it would be $200 billion. And the profit would be even greater.
I’m not going to get my hopes up here. The chances are still ultra low of that ever happening. Plus, the cascading effect would likely be that more suppliers would leave China and just set up shop in other parts of the world where the currency to the home currency remains cheap.
China Mobile will be around long term.
With $75 billion to spend, the company could buy major wireless operators everywhere else in the world. It could buy content producers that would add massive value to subscribers. It could buy JD.com and dominate the ecommerce market in China. No matter what it does or doesn’t do, the stock is likely to continue to appreciate.
Disclosure: I am not long/short any stock mentioned in this article.
