December 30, 2010 - 10:36pm EST by
2010 2011
Price: 49.40 EPS $4.40 na
Shares Out. (in M): 4,063 P/E 11.2x na
Market Cap (in $M): 200,732 P/FCF nm na
Net Debt (in $M): -43,000 EBIT 22,542 0
TEV ($): 157,732 TEV/EBIT 7.0x na

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China Mobile (CHL) is a recession-resistant, recurring revenue, dominant business in China that in my opinion is cheap.


As the world's largest wireless company by number of subscribers, CHL is a well-known mega-cap.  In light of its prominence, it makes sense to keep this note short and to the point:



+ Cheap on an absolute and relative basis: TEV/09Ebit 7.0x, TEV/LTMNetIncome 8.8x, TEV/'10Ebitda-Capex 8.2x; not only do these multiples generally compare favorably vs. wireless (and integrated) major telecom companies around the world but also CHL has higher ROIC and a more attractive home market than its peers

+ Strong economy: secular growth trends in per capita purchasing power

+ Attractive market segment: strong secular growth in wireless market

+ Currency appreciation potential

+ 3-player oligopoly

+ Top-tier ROIC: 7-year avg>56%, FY09 66% (little book definition)

+ Strong free cash flow: US$3.6/shr FY09, 1h10 run rate US$4.8/shr (FCF=cash from ops - all capex)

+ Strong b/s: US$43b net cash, or US$10.6/shr (fully diluted as of June '10); huge pile of appreciating currency



- ARPU (and churn) pressure: as the company has expanded into the lower purchasing power segment of the market, it has had to offer lower price points.  ARPU pressure is somewhat mitigated by higher priced 3G.  Should 3G penetration accelerate as more affordable smart phones proliferate ARPU could see more favorable dynamics.

- Margin pressure: over the last few years, EBITDA margins have compressed from the mid/high 50s to the low 50s more recently

- Government control: potential for capital misallocation (on domestic or international ventures)

- Capital intensive; but steadily decreasing as % of rev (but might see another bump for 4G)

- Market maturing: while not nearly as mature as Korea or Taiwan, the dynamics of more mature Asian markets have often proven frustrating


Additional positives

+ Reasonable mgmt comp

+ Minimal dilution

+ Growing dividend stream and attractive current yield (3.6%)

+ Unencumbered by legacy wire-line operations: its two competitors have major declining wire-line operations that consume capital and management resources

+ Major untapped opportunity: mobile payments -a wildcard that could be huge and where CHL would most likely be the major beneficiary due to its 70% wireless market share


Logically, I believe the positives outweigh the negatives.  And while dismissing the negatives would clearly be foolish, it seems to me the low valuation is more a result of the lack of sex appeal of the story than appropriate pricing of risk.  My guess is the euphoria associated with the multitude of fast-growing IPOs that we have seen from China over the last year is an important factor.  Also, a general disillusionment with telecom has probably not helped the company's valuation.  In addition, there does not seem to be a catalyst that would awaken major investor interest.  The only potential major event that comes to my mind would be an indication of a serious effort to capitalize on the mobile payments opportunity.


In summary, in my opinion acquiring a business in China with a very attractive profile (recurring revenue, recession-resistant, dominant market position, leading ROIC) for less than 9x trailing earnings and less that 10x free cash flow is a good deal.


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