The European economy has been weak after the sovereign debt crisis last year, while emerging markets such as Asia and Latin America remain strong. One of the fastest growing countries is China and an increasing number of investors are investing their money in this promising market. One way to do this is by investing in American Depository Receipts (ADRs).
Investing in ADRs is one of the best ways to gain exposure to foreign markets. The transaction costs of purchasing ADRs are much smaller than the costs of buying these stocks from their local exchanges. Moreover, investors do not need to pay for the costs of converting the US Dollar to the stocks’ local currency by purchasing ADRs.
In this article, we are going to take a closer look at the Chinese stock, China Mobile Ltd (CHL). It has the largest mobile network and mobile customer base in the world. The company is listed on both New York stock exchange and Hong Kong stock exchange. As of December 31, 2011, Cliff Asness’ AQR Capital Management had about $10 million invested in China Mobile. David Dreman, Israel Englander, and Ken Griffin were also bullish about China Mobile.
As the leading mobile services provider in mainland China, China Mobile has advantages in the reach of its mobile network coverage, strong brand name and large customer base. The average network coverage rate of China Mobile in the 36 main cities in China is about 99.86%. Its average coverage rate on high speed roads is above 96% and the coverage rate for major indoor places is 99.9%. China Mobile’s slogan is ‘Pay all efforts to cover everywhere’, which represents its strength in network coverage.
China Mobile achieved its strong network coverage after many years of continuous improvements. Now, the company has grown its network to the point that it would be difficult for other competitors to catch up in a short period of time. The high network coverage rate as well as the stability of its network has helped China Mobile build its reputation and attract customers. At the end of 2010, China Mobile had over 584 million subscribers, about 70% of the 833 million mobile users in mainland China.
On the other hand, China Mobile also has its weaknesses. For example, the company is faced with the asymmetric regulations of the Chinese government. The government would like to see orderly competition rather than monopolization in the telecommunications industry in China.
However, even though China Mobile has certain disadvantages, it is still much stronger than its competitors in general. As a result, the Chinese government has made certain regulatory policies that are favorable to the competitors of China Mobile. For instance, the government allows China Unicom (CHU), one of the largest competitors of China Mobile, to reduce its mobile telecommunications services tariffs by 10% below the standard rates. The asymmetric price regulation and other policies such as market share restrictions have to some extent limited, and will continue to limit, the development of China Mobile. But, China Mobile has developed TD-SCDMA standard to construct its 3G network, through which the company has gained some benefits in government policies, partially offsetting the disadvantages of other asymmetric regulations.
The major competitors of China Mobile include China Unicom and China Telecom Corp (CHA). Both of them have market caps of around $40 billion, much smaller than the $217 billion market cap China Mobile boasts. China Mobile’s valuation levels are also more attractive than its competitors. The company has a forward P/E ratio of 11.48, versus 17.22 for China Telecom and 24.87 for China Unicom. On the other hand, China Unicom and China Telecom are expected to have double-digit earnings growth in the next couple of years, while China Mobile’s earnings are expected to grow at about 1-2% per year as the company is relatively mature. So, investors might not be able to enjoy the robust growth in Chinese economy by investing in China Mobile.
We think China Telecom is a better option than China Mobile. Its P/E ratio is fair and it has a high earnings growth rate of nearly 20%.