China Mobile's One Rich Turtle

11/09/2010 2:05 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

What China’s carrier of choice lacks in 3G prowess, it more than makes up with sheer heft and solid yield, writes Yiannis G. Mostrous in Personal Finance.

As we’ve expected since the onset of the financial crisis, China has been able to not only successfully weather the storm but also engineer a “soft landing” from the initial surge of growth resulting from its economic stimulus package.

China must now find ways to slow growth or it will run the risk of overheating its economy. Containing inflation is the chief concern among policymakers and the reason behind the recent adjustment to interest rates.

Because China is a command economy, interest rate movements don’t have a marked effect on consumption patterns. What does influence consumption is lending quotas, which are dictated primarily by the central government. As long as quotas remain elevated, China’s economic growth will stay on track.

Inflation should stabilize at about 4% and will start to decline as we approach the end of the year. China’s economy is poised to grow by about 10% this year; 2011 will likely be another good year for China. Although I won’t make a formal projection now, all the evidence suggests that China’s GDP will grow by 8% to 9% next year.

China Mobile (NYSE: CHL, Hong Kong: 941) offers defensive growth and has turned in a decent performance this year, returning 15%. The world's largest wireless telecom operator, China Mobile has a customer base of more than 250 million and controls 40% of the [Chinese wireless] market.

Investors often opt for more growth-oriented operators, chiefly those who are leading the way in the 3G rollout. Saddled with China’s homegrown 3G standard TD-SCDMA, China Mobile lags some of its peers in this area.

But China is a developing market, and the vast majority of subscribers choose prepaid packages for 2G voice and data service. As of July 2010, China boasted 28 million 3G subscribers, or 3.5% of the total subscriber base. And recent reports from Chinese telecom companies project that in the next two years, only 151.8 million subscribers will use 3G handsets. That’s less than 15% of the total user base.

Investors should own shares of China Mobile because of the firm’s superior ability to generate cash flows. The company enjoys the best penetration rate in rural China, a market that should continue to grow at a rapid clip as the government endeavors to increase the standard of living in these regions.

China Mobile’s stock should remain relatively cheap because of its robust cash flows and $42 billion in cash on its balance sheet, though the company should deliver strong revenue growth over the next few years. Yielding 3.1%, China Mobile is a buy up to $60.

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