Last month, I wrote about China Mobile Ltd. (HKSE:00941, Financial)(CHL, Financial), remarking on how cheap the stock was in terms of fundamentals. At the time, the world's largest telecom company paid a 7.5% dividend and had no long-term debt. However, I failed to properly take into account the political risks the company faced in the trade war between the U.S. and China. This turned out to be quite the roller-coaster ride, but in the end, it reinforced my view that ignoring politics and focusing on fundamentals is the way to go in the investing world.
On Nov. 12, President Trump signed an unprecedented executive order restricting Americans from investing in companies with ties to the Chinese military (which, much like the U.S. and any other major economy, means a significant portion of the large-cap companies in the country). The order gave U.S. persons until Nov. 11, 2021 to divest themselves from these securities. Trump aimed to bar Americans from trading or owning securities from 35 Chinese companies in particular, which the U.S. Department of Defense has designated as being owned or controlled by the Chinese military.
This list included Telecom companies such as China Mobile, China Telecom (CHA, Financial) and China Unicom (CHU, Financial), as well as surveillance camera maker Hangzhou Hikvision, supercomputer manufacturer Dawning Information (SHSE:603019, Financial) and Semiconductor Manufacturing International Corporation (SMIC, Financial).
On Dec. 29, the U.S. Treasury Department clarified the extent of the executive order, saying U.S. investors were forbidden from owning exchange-traded funds (ETFs) and index funds that contained any of the 35 companies or any of their 50%-owned units and subsidiaries.
Since the executive order, China Mobile's stock has dropped 25% or so, as shown in the chart below. I think it represents outstanding value, just like I did when I initiated my position in the stock.
The executive order covers the activities of both individual and institutional investors, targeting investments in equities, bonds and related derivatives. It also covers "passive" investments in international benchmarks, where investors buy and sell instruments tied to a specific market index. This focus on index-related investments began in May with a White House directive blocking a federal government retirement savings fund from investing about $50 billion to track a Morgan Stanley (MS, Financial) stock index that includes some of the restricted Chinese companies.
In the end, the executive order turned out to be half baked and not properly thought out, but the damage to the stock prices of the Chinese companies in question has been done. It forced American investors to trade the affected companies down to multi-year lows due to panic.
Additionally, the success of the executive order depended on consistent foll-ups from the Trump administration. The Biden administration doesn't even necessarily have to rescind the order to get rid of it - they could just not implement it after its expiry on Nov. 11, 2021. The American Depository Receipts (ADR) of the stocks would most likely continue to trade on the OTC exchange till Nov. 11 and very likely after that as well. Also, the ADR's are exchangeable for H shares as long as your broker is willing to do it for you (if not, I suggest getting a new broker).
The US listing isn't necessary
As far as the Chinese telecom companies are concerned, the U.S. listings are nice to have, but American investors do not account for a large percentage of the shareholders of any of the affected telecom firms. Thus, many ended up overestimating how much of an effect a U.S. delisting would have, even if it were to go through as per the executive order. China Mobile, which has been listed in the U.S. for more than two decades, has the largest portion of its shareholder base in the U.S. - a whopping 2% of its overall issued share capital as of Dec. 31.
China Telecom's main listing is on the Hong Kong stock exchange (HKSE:00941). One option for investors is to exchange their ADR's for China Telecom's common shares. Each ADR will net them five ordinary shares. The ordinary shares are freely tradable in Hong Kong. Bank of New York Mellon (BK) is the ADR sponsor and will deliver the Hong Kong shares upon receipt of the ADR.
The NYSE flip-flop
On Dec. 31, the New York Stock Exchange (NYSE) rather suddenly announced that they planned to delist China Mobile, China Telecom and China Unicomm to comply with the executive order ahead of schedule. However, late on Jan. 4, news broke that the NYSE has reversed its decision to delist, "backtracking on a plan that had threatened to escalate tensions between the world's largest economies."
This just goes to show how many moving parts are involved in politics, and how unpredictable such factors can be in the grander scheme of things. It is far more useful for investors to focus on the company itself.
With China Mobile, I am comfortable with the fact that the stock is very cheap and has enough of a margin of safety that one can ignore the day-to-day news flow, erratic decision making and politics. Whether or not the stock remains listed on NYSE is just a sideshow, in my opinion. The main listing and liquidity are in Hong Kong. The key question is, where else can you get a 7.5% dividend yield on a debt-free company in an oligopoly? I cannot find too many candidates.
Disclosure: The author owns shares of China Mobile and continues to add to them.
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