China Mobile: Stock of the Week

Kate Lin: China Mobile (00941) has been one of the most searched stocks on Morningstar’s Asia websites, as investors seem to have found comfort in the telecom provider.

China Mobile is off to a strong start, riding on its cloud services business. The revenue from this vertical more than doubled in 2022 and it is expected to achieve the same results this year – or at least come close, as management forecasts at least 75% revenue growth to around RMB 100 billion.

But, China Mobile is not without competition in this space, not only from its telecom peers but also from internet giants like Alibaba and Baidu. As late entrants, the growth rates at China Mobile and its two large telco peers dwarf their internet rivals, which only grew a little more than 10% last year, according to Morningstar analyst Dan Baker.

He thinks China Mobile’s role in the information revolution remains underappreciated by the market. So, even after a 38% bull rally in the past 5 months, there is still room for China Mobile stock to gain further.

Another appeal for investors is China Mobile's dividends. The shares yield almost 7% and the annual payout is due on June 26^th. China Mobile continues to generate significant free cash flow, which will support increasing dividend payout to 70% by 2023.

For Morningstar, I am Kate Lin.

 Bulls Say

• China Mobile dominates the Chinese wireless telecom sector with a market share of around 61%.
• The firm generates significant free cash flow, which has provided it with the strongest balance sheet in the telecom world--and one of the strongest, period--despite significant capital expenditures to build out its 5G network.
• China Mobile has the opportunity to leverage its brand, network and technical knowledge to build a strong position in the potentially lucrative cloud services market in China.

 Bears Say

• China Mobile is controlled by the Chinese government, whose objectives may not align with the interests of minority shareholders. In particular, the government would like to see more parity among the three operators and generally lower prices.
• The tower company joint venture requires the sharing of mobile tower infrastructure, so China Mobile may face difficulties maintaining superior network coverage.
• China Telecom, in particular, has been taking mobile market share from China Mobile. New entrant, China Broadnet, could also cause some short-term pricing pressure