Put China Mobile in Your Pocket
The undervalued carrier is set for more aggressive growth with the launch of 4G services and 5G on the horizon.
China Mobile’s (CHL) 2017 results were broadly in line with expectations, with service revenue up 7.2%, EBITDA up 5.4%, and net profit up 5.1%. This compares with services revenue growth of 7.1% and EBITDA growth of 5.5% for the first nine months, implying similar fourth-quarter growth rates, which is to be expected with such a large recurring revenue stream. While we would expect higher operating leverage on 7.2% service revenue growth from a telecom operator, we accept that China Mobile has been investing heavily in new revenue growth engines such as fixed broadband, corporate services, Internet of Things, and mobile payments. The quarterly profit growth is broadly in line with our full-year estimates, but we’ve reduced our forecasts slightly to account for the more competitive mobile market, now that China Unicom (CHU) is back in the game after a two-year hiatus.
We’re retaining our narrow economic moat rating but have lowered our fair value estimate to $65 per ADR from $71. This valuation implies a forward price/earnings multiple of 14.8 times and a dividend yield of 3.0% (excluding the anniversary special dividend), making China Mobile’s shares attractive at current levels, in our view. We expect the company to be able to maintain its earnings growth at mid-single-digit rates per year in the medium term. We do retain our Poor stewardship rating for China Mobile, based primarily on the company’s poor capital-management record.
Dan Baker does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.