China
Mobile Limited Sponsored ADR (CHL, $37.73): “The Mobile Services Giant Shows
Potential for Rebound Following Ten-Year Low”
By:
Adán Jiménez, 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.
Summary
• China Mobile Limited (NYSE: CHL) is the world’s largest mobile
telecommunications company with a market cap of over $160B USD. The company is
headquartered in Hong Kong and also operates in mainland China, serving approximately
940 million customers. China Mobile generates its revenue from data services, voice
services (fees associated with traditional phone calls), and sales of products,
namely terminals.
• The telecommunications
industry in China is shifting from rapid growth to high value services. The
homogenous nature of mobile services has led to tight competition and high
saturation which has made the industry suffer as a whole.
• Challenges from the
world economy as well as a domestic slowdown has depressed China’s GDP growth
to a 27-year low of about 6%. In addition, industry-wide increases in capital
expenditures and decreasing returns from data traffic, largely due to
regulation, present further challenges for China Mobile.
• Management is looking
to find a balance between short-term growth and long-term development. They are
hoping to leverage their economies of scale in maintaining their
industry-leading profitability. China Mobile also believes that they will be
the leading player in the development of 5G in China, hopefully boosting
consumer sentiment and stock performance.
Key
points:
Feeling the effects of uncertainty from a quickly
changing industry, China Mobile is currently trading at a 10-year low of $37.73
USD. Chairman Yang Jie observes that the digital world has shifted from
“enabling infrastructure” to a core force that connects the rest of the real
economy. China Mobile’s lack of readiness in navigating the changing landscape,
along with increased competition and a global economic slowdown, continues to
have adverse effects on the company’s performance.
Furthermore, and perhaps
one of the most challenging risks the company faces, is the national “speed
upgrade and tariff reduction” policy that has been implemented by the Chinese
government. Telecommunication tariffs are the contracts between providers and
the public which outlines rates, fees, and other charges. These tariffs, along
with increased competition, have decreased revenue per mobile per month nearly 8%
in 2018. These policies will continue to be a major risk going forward.
Despite its currently unfavorable
position, there is strong reason to believe that China Mobile will rebound. The
company had a tough year, but it remains a massive value company with an
outstanding customer base and an abundance of resources.
Recognizing the reigning
influence of the digital world, China Mobile has positioned itself to be a
future leader in the 5G space. Building on existing 4G stations, the company
plans to build 50,000 5G stations and launch 5G in over 50 cities. They have
also increased their focus on building partnerships with internet companies
that will increase their data traffic—up 132.5% in the first half of 2019
compared to the same time period in 2018 at an impressive 7.1 GB per user per
month. China Mobile has certainly recognized several strategies to revitalize
its performance in the near future. The company’s extensive network, powerful
brand value, and economies of scale gives it the competitive advantage to
outperform the industry and potentially rally its way back up.
What
has the stock done lately?
In the five weeks
following the third quarter earnings call on October 21, 2019, CHL stock has
continued to plummet—down nearly 10% since the announcement. Operating income,
down 0.2% from the same period last year, added further uncertainty to already
declining market sentiment.
Past
Year Performance:
For many of the challenging factors previously
mentioned, CHL is currently trading at a 10-year low of $37.73/share, down
22.6% from the same time last year and over 30% since the company’s
announcement of its 2018 results in late March this year.
Source:
FactSet
My
Takeaway
China Mobile had one of
the most difficult years in company history in 2018 and its market value has
continued to suffer tremendously. The stock was initially added to the AIM
International Equity fund at $57.52/share with a price target of $65.77 in May
of 2016. For the most part, the price has seen a steady decline since its
addition to the portfolio and a severe decline in the past year. The original
drivers of 4G expansion, a successful acquisition of TieTong that resulted in
greater distribution of broadband services, and a growing customer base have
all been fulfilled. These drivers certainly supported China Mobile’s
performance for a couple of years but management’s inability to adapt to the
changing industry and increasing competition has done its damage on the
company’s market value. Still, it seems that China Mobile has finally developed
sound strategies that can be successfully implemented with their competitive
advantage of cost-efficiency and massive customer base. Although it is unlikely
that CHL will reach the original target price, the company has the ability to
rebound from this recent drop and at least reduce our loss. For these reasons,
it is recommended that China Mobile be held in the AIM International Equity
portfolio under tight watch.
Source:
FactSet
