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)


  1. I own shares of China Mobile and plan to keep them. I believe the market has overeacted to the re-org. Where I am confused is with the merger of CHU and CN. I own CN and when the stock was suspended it was worth around $68 per share. CHU was only worth $23. The Hong Kong shares are much closer in value so a 1.5 shares for each CN share sounds fair in HK currency. Not the same if you own shares on the NYSE. Every analyst seems to be assuming the exchange rate will be the same for Hong Kong Shares as NYSE. Does anybody knows. Seems like everyone is panicking and only selling. I am holding and still believe telecommunications is a great place to be in China.

  2. This telecom revamp is more like a family inheritance problem: so this old guy (Chinese goverment) has 3 sons, he may have given better land to the eldest son (CHL), but he also gave decent horses and cows to the 2nd (CHA) and 3rd son (CHU). The oldest son worked hard, and in the fall he got good harvest (rice, corn,…). The other two sons also worked, but not as hard, thus did not make much money for the year. So they went to their father: can we have some of the land from our bro? The old guy wants a peaceful life, so he asked their eldest son give up some of the land, and not to use fertilizer (i.e, they can only use TD-SCDMA for 3G, not the mature standard WCDMA).

    What will happen in the second yeay? Let’s stay tuned…

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