By Isabella Zhong
China is the land of big numbers. So it should be little
surprise that when China Mobile upgraded its estimate for the
number of additional customers expected to use its new mobile
service that the number would be significant.
How significant? China Mobile now expects it will have 70
million users of its 4G mobile service by the end of the year, an
impressive increase from its initial forecast of 50 million users.
To give some perspective, that 20 million subscriber increase is
roughly equal to the population of Australia.
It's the strong take up of China Mobile's (941.HK/CHL) 4G
service that has the stock poised to ring up further gains even
though it has been one of the top performers on Hong Kong's Hang
Seng Index this year. The stock has advanced 20% since the start of
the year, leaving the meager 3% gain by the benchmark in its dust.
But the nifty gains have not translated into a premium valuation.
In fact, at 14 times forecast earnings, China Mobile trades at a
discount to rivals China Unicom (762.HK/CHU)and China Telecom
(728.HK/CHA), both of which trade at about 16 times. The
combination of appealing valuation and earnings growth, coupled
with a pullback in the share price from its record high in
September, makes a China Mobile a buy.
A lift in earnings from the uptake of the 4G service by China's
millions of mobile users lies at the heart of the bullish outlook
for the stock. China Merchants Securities analyst Alex Ng, who
initiated coverage last month with a buy rating, calculates the
expanding use of China Mobile's 4G service could lift earnings per
share by around 10% next year. Stronger earnings growth should help
lift the stock towards his target price of HKD115 a share, which
implies around 20% upside from its current price of HKD95 a
share.
The ability to offer a 4G network service is a draw card for
China's mobile operators given it is much faster than its 3G
predecessor. Speed is an advantage in an age where demanding
consumers are hungry to download content on mobile devices.
Commanding a hefty two-thirds share of China's mobile services
market, China Mobile also has more than 700 million existing 2G and
3G subscribers that could be converted into 4G customers.
China Mobile was quicker off the blocks in the 4G race. While
all three companies received licenses last December to launch 4G
services on the TD-LTE standard, which put more simply is a
standard used within China. China Unicom and China Telecom decided
to wait for approval to launch hybrid 4G networks that also include
the FDD-LTE standard, which is used in countries like the U.S. and
Japan. China Unicom and China Telecom are expected to receive
licenses later this year. "While having the FDD-LTE standard will
allow Unicom and Telecom to accommodate inbound roaming users from
overseas, it doesn't give the companies much of an advantage with
domestic users," says Chris Lane, a senior analyst at Bernstein
Research.
While its rivals have been waiting to launch their 4G network,
China Mobile has moved aggressively to sign up customers eager to
migrate to the faster speeds offered by the company's new service.
Armed with lower tariffs and better coverage, China Mobile is
aiming to win back customers that abandoned it when its two major
rivals unveiled a faster 3G network. In a masterstroke move, China
Mobile also inked a deal with Apple (APPL) to introduce iPhones
that were compatible with its network, putting it on the same
footing as its rivals. Bernstein's Lane reckons that up to 30% of
China Telecom's 3G users and 39% of China Unicom's users could
return to China Mobile.
Given the competitive advantage gained by moving faster than its
rivals to launch a 4G service, it is understandable why China
Mobile unveiled an increase in its projected subscriber numbers
this week. But Bernstein's Lane reckons that the company could end
up exceeding its revised numbers, possibly attracting 75 million
subscribers by the end of the year, and then signing up another 125
million users in 2015.
Given With the robust outlook for signing up new customers, it's
not surprising that analysts are penciling in stronger earnings.
Barclays analyst Anand Ramachandran reckons the company's profits
troughed in the second half of this year and will increase in 2015
as the impact of a value added tax on telecom services passes and a
tighter rein is kept on costs. The benefit of cost controls was
visible in third quarter earnings where operating margins expanded
to 37.1% from 35.7% the previous quarter. He argues that market
confidence in the earnings turnaround should support a rerating of
China Mobile shares.
There is also the potential for the company to be more generous
with its shareholders. Capital expenditure is expected to decline
given the company has built the 4G network. Barclays Ramachandran
is estimating net cash inflows of RMB9 billion next year, which
could open the way for the company to increase dividends.
Just as China Mobile moved early to gain a competitive advantage
in the 4G market, investors could be well rewarded by moving
quickly to snap up shares in a stock offering earnings growth at an
attractive valuation.
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Email: isabella.zhong@barrons.com
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Comments? E-mail us at asiaeditors@barrons.com
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