Pat McKeough responds to many requests for advice on specific stocks and other questions on investment and the economy from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle. This week, an Inner Circle member asked about the largest wireless provider in the world. China Mobile competes with two other Chinese wireless providers, each of which has the advantage of being compatible with Apple iPhones, while China Mobile is not. Pat looks at whether an upgrade of China Mobile’s network and new chip technology will let it hook up with Apple and other popular smartphones and keep its lead in the Chinese market. Q: Hello Pat: Thank you for your excellent advice. What do you think of China Mobile? Thank you. A: China Mobile Ltd. (ADR, symbol CHL on New; www.chinamobileltd.com) is China’s leading cellular service provider, with over 726 million customers and 64% of the country’s mobile market. In addition, the company operates the world’s largest cellular network and is the biggest wireless firm in the world by number of subscribers. It also provides cellular services in Hong Kong. Chinese government-owned China Mobile Communications Corp. owns 74.2% of China Mobile. In the first three months of 2013, China Mobile attracted 16.0 million more new subscribers, including 12.3 million users of its 3G wireless network. That helped push up revenue by 5.7%, to $21.8 billion from $20.6 billion a year earlier. Earnings rose only slightly in the quarter, to $4.5 billion. That’s mainly because the company was forced to heavily subsidize handsets for 3G users to compete with rivals China Unicom and China Telecom. China Mobile also continued to invest heavily in upgrading its network. [ofie_ad]
China Mobile spending over $7 billion to upgrade network
One drawback China Mobile faces is that it uses a TD-SCDMA network. This standard is only used in China and is not compatible with the Apple iPhone. As a result, China Mobile is missing out on sales of iPhones and the fast-rising data charges that users incur while streaming videos and playing games. (China Mobile does have 114.4 million users on its 3G network using smartphones, but that’s just 16% of its total subscribers.) At the same time, Apple is missing out on sales to customers of China’s biggest network. By contrast, rivals China Unicom and China Telecom operate on the CDMA standard, which is what major U.S. carriers like Verizon Wireless use. That lets both companies offer the iPhone, along with many other popular smartphones. China Mobile is now upgrading its network, at a cost of over $7 billion this year alone, to a TD-LTE 4G standard. 4G (fourth generation) long-term evolution (LTE) wireless networks are up to five times faster than those in use today—but this network is also not compatible with the iPhone. However, computer chip companies such as Qualcomm (symbol QCOM on Nasdaq) have developed chips that are compatible with a variety of wireless networks. China Mobile has been raising its dividend each year since 2004. It now pays $2.20 per ADR, for a 4.0% yield. The company aims to pay out 43% of its earnings as dividends this year. The Chinese cellphone market is very competitive, particularly in the fast-growing 3G and 4G segments. Even so, China Mobile has significant advantages: aside from being the country’s largest cellphone company, it also has close government connections. Right now, about 74% of China’s population has a mobile phone, but just 14% have smartphones, so there is lots of room for growth. The ADRs trade at 10.8 times the $5.15 per ADR that the company is expected to earn this year. In the Inner Circle Q&A, Pat looks at how soon China Mobile will be able to start buying Apple iPhones. He also looks at whether the company’s cash flow will be sufficient to keep expanding its network at the same rapid pace. He concludes with his clear buy-hold-sell advice on the stock. (Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.) COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members Although the Chinese economy has “slowed down” to a lower rate of growth than in the past decade, it continues to grow at a much faster pace than Western economies. Do you believe Chinese stocks will be an increasingly profitable area for Canadian investors, or do you think there are too many uncertainties with Chinese companies to make any substantial investment in them? Let us know what you think.
