Second thought on China Mobile CHL

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(Update May 26 11:35PM) Just found the Google finance has the wrong EPS and PE ((EPS 2.62, PE 29.92) for CHL. Yahoo finance has the right number for CHL: ttm EPS $3.08, PE 25.44 as of Friday May 23.

Market sentiment
GS downgrade (Bloomberg): the ladies at Goldman Sachs cut the rating of 0941 (China Mobile H share) from neutral to sell, and cut price target from 135 HKD to 105 HKD. I don’t trust Goldman rating blindly (no disrespect to people at GS), this downgrade combined with the share drop both in NYSE and Hongkong, signals the big boys are leaving the table. I don’t want to stick my head out at this time, so I am going to sell 2/3 of my CHL shares tomorrow morning (Tuesday May 27).

China telecom re-org pic
(Source: XinHuaNet)

More background of the re-org, 3G license

China Mobile (NYSE:CHL; HK:0941) and its shareholder were the largest benificiary of China telecom/mobile boom in last 10 years, some people said it offers the most cream on the China telecom cake “移动通信堪称最近十年里电信蛋糕上最丰厚的一层奶油” (source: Caijing). Compared to other players China Unicom (CHU), China Telecom (CHA), they are much more profitable in 2007 (see appendix).

1) At the same time, many people are envy of the cream at China Mobile, and want to get a slice of it. Those people range from the competitors, the suppliers and even consumers. The re-org will offer opportunity for them. At least the people who joined China Mobile as senior executive (hint: stock options).

2) The suppliers are expected to benifit from the 3G deployment in China, which for some strange reason, is tied to the re-org of China telecom industry.

3) Consumer and goverment. The Chinese goverment emphasized the harmonious society a lot in recent years. This does not mean the goverment is going back to the old days when everyone is equally poor. The goal is make sure the difference between rich and poor does not grow too wide, for instance, the employees in China Mobile will not get twice pay as much as people at China Unicom. Also goverment regulatory has lowered the mobile phone roaming fees couple month ago.

That being said, I don’t think the goverment (majority shareholder) will do things unfairly to minority shareholder of CHL. After all, it’s to their interest if China Mobile truely grow into a global brand, such as Vodafone.

Fundamental of China Mobile
1) Management is still largely intact. They kept Wang Jianzhou on the top job, while installing the second guy Zhang Chun Jiang. According to some speculation Zhang will push the TD thing. And I believe Wang will still in charge of international growth and overall strategy. Note Wang is widely regarded in the international scene among shareholders and partners.

2) Growth: with a nearly 400 million subscriber base, it’s harder and harder to grow at fast pace as before. The growth mainly come from rural areas (voice), and data/valued added service in cities. In Q1 2008 the top and bottom line growth was about 20%, and 37% respectively.

3) 3G/TD: I think many people over-estimated this 3G and TD thing. The consensus is China Mobile has the inferior domestic brewed technology TD-SCDMA 3G standard, while China Unicom and China Telecom will have better and mature technology: wCDMA and CDMA2000. Personally I don’t think 3G will be a big thing in China. Does that mean China Mobile will blew away the money invested in TD? The answer is No. Because according to Wang Jianzhou (again Caijing), 根据目前现实的情况,我们在扩容的时候,充分考虑到3G到LTE(Long Term Evolution,“长期演进”技术,WCDMA和TD两种3G标准的技术演进方案)的过渡. He was saying the TD technology and equipment will be used in the future 4G deployment. The 3G will not be big because it provides not-much improvement vs. current 2.5/2.75G technology.

4) Last but not least, the stock. I think it will become a good buy if we can get it at 67/68, with 2007 earning of $3, and growth of 30%, it will have upside to 90 (3*30). Once they demonstrate solid growth and profit, and people at CHU and CHA continue to come out with so-so numbers, the same people downgrade CHL will jump back to the wagon.

Until then, I will only keep a few shares of CHL.

Appendix (source: Caijing)
2007年,中移动股份营业收入为3569.59亿元,比上年增长20.9%;股东应占利润为870.62亿元,比上年增长31.9%;利润增长速度创近五年之最。
  它将另一家中国移动运营商中国联通远远甩在身后。中国联通股份有限公司(香港交易所代码:0762)2007年收入为995.4亿元,利润为93亿元。
  两家固话运营商中国电信、中国网络通信集团公司,更在固话市场难以挽回的衰退中相形见绌。中国电信股份公司(香港交易所代码:0728)和中国网通(香港)有限公司(香港交易所代码:0906)在2007年的利润分别为237.02亿元和105.78亿元