Wednesday, December 4, 2019

A Current AIM International Equity Holding: China Mobile Limited Sponsored ADR (CHL, $37.73): “The Mobile Services Giant Shows Potential for Rebound Following Ten-Year Low”

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.


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