Dialing China for Wireless Growth

05/19/2009 10:33 am EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

China Mobile and China Unicom are solid value plays with vast potential, writes China Stock Digest editor-in-chief Jim Trippon.

China Mobile (NYSE: CHL) is the world's largest wireless telephone company, with subscribers numbering more than 477 million. One of China's less volatile large cap stocks, [it's up not quite 10% since March 24.]

The company reported profit growth of 5.2% for the first three months of the year, a rate that disappointed some analysts, leading to a mild decline from China Mobile's most recent peak price in the $48 range. The company remains attractively valued at approximately half of its 52-week high, with a relatively low P/E multiple of 11x. [Shares closed at $47.49 Monday in New York—Editor.] China Mobile's all-time high is over $100 per ADR, and the firm continues to add millions of subscribers every month.

[However,]  China Mobile is not growing as quickly as it used to because of the current economic slowdown. Also, increasing competition from firms like China Unicom (NYSE: CHU) takes a large slice of the market due to Beijing's reorganization of the telecom sector.

The next big battlefront for China Mobile is the relatively new and ultrafast 3G wireless sector. By offering small laptops (netbooks) equipped with 3G chipsets at half price in its stores, China Mobile is aggressively carving out a niche in the relatively new and expensive arena.

For the most recent quarter, most of China Mobile's growth has been in relatively low-revenue rural areas. If the company can make good on its 3G targets, it should enjoy substantial profit increases and stock price appreciation. For long-term buyers, China Mobile offers an attractive dividend yield of 3.8%.

CHU is in direct competition with China Mobile for wireless and 3G subscribers. Unicom has a slight advantage in the 3G arena, because it offers an international platform for the high-speed technology, whereas China Mobile is obliged to [use a Chinese standard.] That means hardware available worldwide can be used on the China Unicom network.

China Unicom is substantially smaller than China Mobile with approximately 130 million subscribers, the company [should] gain new competitive advantages in the coming month by announcing agreement in prickly talks with Apple (Nasdaq: AAPL) for access to the iPhone. China Mobile previously refused to give in to Apple's demands. China Unicom is also expected to reach agreement with China's most popular search engine, Baidu (Nasdaq: BIDU) for advanced search technology on the company's network.

Holding both of China's largest wireless carriers gives investors something of a hedge in [case] one company takes a large [share] of business from the other. Although this is a safety measure for investors, we don't expect massive erosion in either company's subscriber base as the telecom sector and 3G service continue to expand in China.

China Unicom has a slightly lower dividend yield than China Mobile, returning 2.5% annually to stockholders. It has a higher valuation because of its [faster growth] in the enormous Chinese wireless market. [Shares closed at $12.27 Monday in New York—Editor.]

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