What Is Driving Our $49 Price Estimate For China Mobile?

After the commercialization of 4G services in 2014, China Mobile’s (NYSE: CHL) 4G customer base swelled from 91 million in 2014 to 713 million in 2018. 4G adoption was bolstered by the government’s Speed Upgrade & Tariff Reduction policy, which led to a nearly 40% (y-o-y) decline in data tariffs since 2015. Though China Mobile’s revenues continued to expand despite tariff reduction directives, the trend reversed during the first half of 2019. Trefis maintains China Mobile’s valuation at $49 per ADR, which is about 15% above the current market price, primarily due to consistent improvement in profitability and a stable dividend payout ratio.

A Quick Look At China Mobile’s Revenues

We expect China Mobile to report $108 billion in Total Revenues for full-year 2019. It includes three segments:

• Voice Services: $12.5 billion in FY2019 (12% of Total Revenues). It represents income from voice calls over the company’s network
• Data Services: $83 billion in FY2019 (76% of Total Revenues). It includes income from wireless data, wireline data, SMS/MMS services, and application services such as IoT.
• Product Sales: $13 billion in FY2019 (12% of Total Revenues). The company promotes handset sales bundled with various service discounts as a means to expand its customer base.

Profitability improved despite ongoing tariff reduction

• After the Chinese government’s ‘speed upgrade & tariff reduction’ directive in 2015, China Mobile’s total revenues have grown at a low single-digit rate.
• However, the company’s profitability improved from the reduction in service costs.
• China Mobile’s EBITDA margin increased from 35.8% in 2015 to 37.2% in 2018.
• Per the latest interim report that highlights the company’s performance till June 2019, China Mobile’s revenues declined by 0.6% during the first half of 2019 but EBITDA margin improved by 1.6% (y-o-y) to 38.8%

Improved profitability resulting in a stable payout ratio

• China Mobile’s total revenues have grown at a CAGR of 3.3% from RMB 668 billion in 2015 to RMB 736 billion in 2018.
• The company’s earnings per share increased from RMB 5.31 in 2015 to RMB 5.75 in 2018 – representing an average annual growth rate of 2.75%.
• Over the last three years, China Mobile has returned RMB 212 billion in dividends to the shareholders to maintain a dividend payout ratio of 49%.
• Consistent with the company’s strategy to further reduce mobile tariffs by 20% in 2019, we expect China Mobile to report $109 billion in total revenues for the full year.
• Moreover, we expect a one-percentage-point improvement in EBITDA margin for 2019, driven by the closure of 1,700 underperforming retail outlets.
• However, the net income margin is likely to trend lower from higher depreciation charges associated with investments in 5G network development.
• Thus, Trefis maintains China Mobile’s valuation at $49 per ADR, using a forward P/E multiple of 13.5 and a forecast of $3.65 for earnings per ADR in 2019.

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