Why China Mobile CHL is a buy: IV

Two important news about China wireless arena yesterday.

1) China Mobile finally started the long awaited trial of TD-SCDMA 3G network (read Chinese news story 1 , and 2 from XinhuaNet). Some features of 3G include the video conference/phone, TV program, etc.

2) The new (lower) roaming fees takes effect.

I think 2) may have slightly negative effect on CHL’s earning, while 1) is insignificant and we will not know the success of 3G/TD until 2009/10.

China Mobile 3G TD-SCDMA trial
(Picture from XinhuaNet: people are lining up for 3G phones)

Valuation

As I read the “equity” section of CFA books, I spent some time calculating the earning, dividend growth rate of China Mobile in last 5 years. As shown in this spead sheet, the Compound Annual Growth Rate (CAGR) for earning (2002 to 2007, in RMB) is 20.52%, and CAGR for dividend (in HKD) is 44.23%.

One reason for the disparity of earning and dividend growth rate is they increased payout ratio quite a bit in recent years, from 19% to 46%. This could change if they decided to move forward with 3G commerial launch, because 3G captial spending (network infrustructure) will not be trivial. It is reported ( Chinese news from 21cbh) China Mobile was aggressive on depreciation (conservative from accounting point of view), so hopeful that will offset some of the new spending.

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