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China Mobile - High Dividend, Low Debt, Massive Scale

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GuruFocus.com
·3 min read
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- By Praveen Chawla

China Mobile (NYSE:CHL) is the largest telecom company in the world with close to a billion customers. It is also the largest of the three telecom companies which control the Chinese market, the others being China Unicom (SHSE:600050) and China Telecom (NYSE:CHA).

Given the Chinese market is now quite saturated, growth will likely come more from data use increases and IoT (Internet of Things) rather than the number of subscribers. However, the company has no long-term debt and the balance sheet is very solid, as shown in the diagram below.


China Mobile - High Dividend, Low Debt, Massive Scale
China Mobile - High Dividend, Low Debt, Massive Scale

The company also pays a great dividend. While the dividend per share has been flat because the share price has been going down, the yield is at an all-time high.

China Mobile - High Dividend, Low Debt, Massive Scale
China Mobile - High Dividend, Low Debt, Massive Scale

China Mobile is also moving its network to 5G and moving to a data-centric vs. a voice-centric business model. With its vast network, it is expected to maintain a lion's share of the mobile data market in China.

China Mobile''s subscriber count has suffered from the pandemic and the shutdown, but now that China's economy is rebounding, the subscriber count should recover, and I expect share price will follow. Revenue and earnings were up strongly from December to June. For those interested in the earnings reports, the company reports only twice a year, and its next financial report is not due until April 2021.

CHL

Growth

?

Dec 19?June 20

Revenue per Share

8.31%

EBITDA per Share

-1.54%

Earnings per Share (Diluted)

10.41%

Book Value per Share

1.07%

Tangible Book per Share

2.26%

Operating Cash Flow per share

30.58%

Free Cash Flow per Share

30.59%



In spite of paying out an excellent dividend, China Mobile has continued to increase its book value over the last decade at a 6%+ CAGR:

China Mobile - High Dividend, Low Debt, Massive Scale
China Mobile - High Dividend, Low Debt, Massive Scale

China Mobile's stock has been on a downturn since 2016, when its double-digit revenue growth stalled. It has certainly converted to more of a value stock now. The Gurufocus system has triggered a "possible value trap" warning due to such a dramatic decline in share price. I think at this stage with a price-earnings ratio of ~7 and a 7.5% dividend, I don't really need any growth to make the investment worthwhile.

China Mobile - High Dividend, Low Debt, Massive Scale
China Mobile - High Dividend, Low Debt, Massive Scale

The Gurufocus system is also showing that based on several valuation metrics, China Mobile is undervalued, as shown in the below chart. Plus, with a nearly 7.5% dividend and a debt-free balance sheet, I do not see a whole lot of risk.

Symbol
Company
Current Price
Price-to-Graham-Number
Price-to-GF-Value
Price-to-Projected-FCF
Price-to-DCF (FCF Based)
Price-to-DCF (Earnings Based)
Margin of Safety % (DCF Earnings Based)

CHL

China Mobile Ltd

$28.3

0.5

0.6

0.6

1.8

0.7

27.8



China Mobile - High Dividend, Low Debt, Massive Scale
China Mobile - High Dividend, Low Debt, Massive Scale

One area of perceived risk is that the government of China owns over 72% of the stock, and its social objectives will not necessarily align with those of private shareholders. While this is a risk, I have come to see stock as a kind of Chinese government bond proxy. For perspective, the China 10-year Government Bond has a 3.324% yield. Though anything is possible, in my opinion, the company is too important for China to take unilateral action like eliminating the dividend or otherwise harming the minority shareholders too much. However, it is safe to say that profit maximization is probably off the table given the majority government ownership. No stock is perfect.

Hedge fund guru Jim Simons (Renaissance Technologies LLC) has been ratcheting up his ownership of China Mobile stock and owns over 10 million shares, indicating his firm believes the stock is a good value. I am also happy being a very junior partner with China Mobile and collecting the lush dividend in this low-interest world, waiting patiently for the price to catch up with the value.

Disclosure: The author owns China Mobile stock.

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This article first appeared on GuruFocus.