Friday, February 17, 2017

An AIM International Holding: China Mobile Limited (CHL) by Anthony DiSanto. “*Moving Millions to 4G"

China Mobile Limited (CHL, $56.99): “*Ring Ring* It’s The Internet Calling.”
By: Anthony DiSanto, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

  • China Mobile Limited (NYSE: CHL) is as an investment holding company and offers mobile communication services, mobile-related services, and fixed line services through their subsidiaries.
  • The overall consumer base has continued to grow throughout 2016, with 22.32 million new mobile customers. As of September 2016, ARPU has also grown 1.7% year-on-year to RMB60.
  • Since pitched, their investment in the 4G space has paid off. Subscriptions increased from around 400 million to over 530 million, as of December 2016.
  • After the decision for the three main players in the Chinese telecommunication industry to sell their towers to China Towers, analyst estimate the savings for CHL come to about $350 million in operating expenses for the first year.
  • CHL has signed a strategic agreement with Ericsson to cooperate on the Internet of Things, utilizing the Ericsson Device Connectivity Platform. This will lead to new business opportunities in the future, among a multitude of other benefits.
Key points: China Mobile Limited, the largest player in China, continues to grow steadily. Over 2016, they have added over 20 million new customers, as well as increased ARPU. With the focus now on the internet industry, the stock has responded well to their movement within the space. After witnessing a 17.74% decline, between the months of October and December 2016, it has seen a rebound of 9.77%.

Entering 2017, CHL announced a strategic partnership with Ericsson in the Internet of Things space. They will be using the Ericsson Device Connectivity Platform and have already ran a test with an app in Shanghai. The mobile bike sharing app, Mobike, uses IoT technology on their bike to more accurately track them in areas that traditional mobile coverage cannot reach. Additionally, the new technology has reduced the wait time to rent and unlock the bikes.

As new opportunities arise in the industry, CHL has the benefit of being backed by the government. This allows them to enter into collaborative agreements faster, as well as having a “safety net” in times of struggle. For example, China Towers occurred because of government pressure to bring the population into faster mobile connectivity. Since moving to a cell tower rental platform, China Mobile is able to invest more into their R&D opportunities.

Going forward, there are still many growth opportunities. With over 844 million subscribers, only 481 million are using 4G and 119 million on 3G. Thus, there will be about 244 million on the 2G network migrating over and in turn generating substantial revenue from data use.

What has the stock done lately?
Since 2017 began, China Mobile Limited has risen 8.70%. China is looking to be a major player in the internet industry and has established a $14.6 billion dollar “internet fund.” This will be used to support internet focused companies and has seen a lot of support from the telecom firms. With the announcement of a partnership with Ericsson and a successful test with the bike app, CHL has seen much share appreciation. As they aggressively pursue big data and the Internet of Things, China Mobile’s future appears promising.

Past Year Performance:
CHL has had a rocky year, hitting a peak of $63.72, on August 18th, and low of $51.92, on December 23rd. Although in total, it has increased 7.31% since February 8, 2016. After taking a hit because of the Brexit vote, it rose above $60 for the first time that year. In October, as market penetration was nearing its ceiling, data traffic growth began to subside. Investment firms began to swap CHL with CHU causing pricing pressure in the market. Recently, as China Mobile begins to focus on the internet the market appears to be reacting positively and share price is starting to rise again.

Source: FactSet

My Takeaway
As the telecommunication industry continues to evolve into something new, CHL is leading the way in China. The positive test results in the IoT space are being reflected in the stock price, I believe that within the coming months we can see the share price climb back about the $60 mark. Furthermore, as China’s inland population continues to gain affluence, many of the 2G subscribers will be transferring over to 4G. This will drive data revenue substantially, given there are about 244 million still on the 2G network.

Source: FactSet

1 comment: