Recently in my Special Report on Disrupted Sectors on the coming 5G disruption to the telecom and Internet space on my subscription JubakAM.com site, I noted that China would be relatively early to roll out 5G capacity and handsets and that because of that timing and China’s huge wireless phone market, the country would be a leader in 5G technology and its global consequences. And I said that I would be adding China’s largest phone operator China Mobile (CHL) to my long-term 50 Stocks Portfolio.
Which I did today July 11.
But China Mobile crossed my radar screen for another reason. The stock is value-priced and today again on my subscription JubakAM.com site I’ve made it the #4 pick for my 5 Value Stocks Special Report. Morningstar calculates that the shares are 26% undervalued.
China Mobile currently trades at 10.36 times trailing 12-month earnings per share and 10.87 times the projected forward earnings per share.
That puts the stock well below the current average forward price per share for the Standard & Poor’s 500 of 16.9. (The average fit e-year forward Price to Earnings for the S&P 500 is 16.5 and the 10-year average is 14.8. Just for some context. The S&P 500 isn’t especially over-valued right now unless you factor in where we are in the business cycle as the Cyclically Adjusted PE Ratio (CAPE Ratio but also known as the Shiller PE Ratio) does. By that measure the PE for the S&P is 30.52, almost double the average for that indicator of 16.64.)
There is no reason that China Mobile should trade at a market average forward PE. It is a deeply flawed stock due to the role of the Chinese government in the country’s wireless phone sector.
But the current PE of 10.87 times projected earnings is well below the stock’s five-year average of 13.13. Or the 2016 PE of 13.34 or the 2015 PE of 13.75.
A return that 2015 PE of 13.75 would still mean the stock trails the valuation of the U.S. S&P 500 but would likely mean a gain of 20% to 30% or better for the stock.
Sometimes a value stock is cheap enough so that it doesn’t have to become perfect to make you money. All it has to do is be better than it has been recently.
Much of the problem with China Mobile is that the company has been caught behind the technology curve. The company dominated China’s market back in the days if 2G. But in the era of 3G and 4G, the company’s technology was decidedly inferior to that of its competitors. That began to change with the transition to 4G where China Mobile began its rollout about a year earlier than competitors who only got their national 4G license in February 2015. At this point China Mobile has more 3G and 4G customers than its competitors. But those companies have worked hard to overcome that lead and to a degree they’ve succeeded with China Mobile’s market share by service revenue dropping to 63% from 67% from 2017 to 2018.
5G brings China Mobile an opportunity to leapfrog competitors. Its 925 million customers provide the company with huge free cash flow.That plus its significant cash balance should let the company build out its network faster than competitors. At the end of December 2018 China Mobile had net cash and cash equivalents of $63 billion.
I expect to see China Mobile continue to close the revenue growth gap with competitors. In the first quarter of 2019, for example, competitor China Unicom (CHU) reported service revenue growth of 0.3%. China Mobile saw service revenue drop by 0.5%. That’s not great but still better than the gap for all of 2018 when China Unicom reported services revenue growth of 5.9% while China Mobile reported service growth of just 0.4%. (China Unicom trades at a forward PE of 19.53 times projected revenue, almost twice the multiple of China Mobile.)
If the era of 5G will be so positive for China’s wireless companies–more streaming means more revenue–then why look for a value stock?
Because the Chinese government has a history of intervening in this sector to move revenue around among players. The Chinese government is the controlling shareholder in not just China Mobile but also in competitors China Unicom and China Telecom (CHA.) Twice in the last 10 years, the government has swapped CEOs among the companies in an attempt to make sure that all the players were operating with roughly the same level of knowledge and managerial competence. At the time of the roll out of 3G technology, the government forced China Mobile to use inferior home-grown technology and limited the variety of handset choices the company could offer. The transition to 4G and now to 5G looks likely to remove some of the handicaps the government had imposed. (Although in 2017 the government made life harder for all wireless operators by reducing the prices they can charge small and medium size enterprises for Internet service.) I also like it the China Mobile owns a stake in China Tower (CHWRF), which provides tower infrastructure. The Hong-Kong-traded shares of China Tower are up 39.08% in 2019 through July 10.
China Mobile currently pays a 4.54% dividend.