Is The Market Undervaluing Chinese Telcos: A Comparison With Verizon & AT&T?

Shares of Chinese telecom giants China Mobile (NYSE: CHL), China Unicom (NYSE: CHU), and China Telecom (NYSE: CHA) have declined by 10%, 21%, and 18%, respectively since the sharp fall of global markets on Mar 9. Interestingly, shares of Chinese telcos remained steady as the number of COVID-19 cases increased in China and fell as the number of cases increased in the U.S.

Even though China Mobile, China Unicom, and China Telecom are state-owned companies that have been facing revenue pressure from regulatory directives towards the reduction of mobile data charges, we believe the market is undervaluing these stocks when compared with U.S. peers Verizon and AT&T. We compare the trends in Chinese telcos’ share price with Verizon, AT&T, and Vodafone Group in the dashboard, Is The Market Undervaluing Chinese Telcos: A Comparison With Verizon, AT&T, and Vodafone?

Shares Of Chinese Telecom Giants Have Dropped More Than U.S. Counterparts Since February

• Since the stock market fall of Mar 9, shares of Chinese Telcos have declined at a double-digit rate.
• However, the stocks of their U.S. counterparts Verizon and AT&T have declined by merely 3%.
• Though Verizon and AT&T have traded at a higher P/E ratio than Chinese Telcos, the P/E ratio (Current Market Price / 2019 EPS) of Verizon and AT&T have declined by just 10% and 12%, respectively. While the P/E ratio of Chinese Telcos (Current Market Price / 2019 EPS) has declined by more than 20%. (Note: Chinese Telcos have not reported FY2019 numbers yet, and we consider our estimated EPS for the calculation.)
• Moreover, Verizon has increased its capital expenditure guidance to accelerate the transition into 5G.

Considering The Slow Growth of New Cases In China, Is The Market Unfair Towards Chinese Telcos?

• China Mobile, China Unicom, and China Telecom serve 942 million, 324 million, and 330 million Chinese customers, respectively.
• Whereas Verizon and AT&T’s mobile subscriber base stands at just 116 million and 75 million, respectively.
• With the current outbreak carving out a remote working culture across corporates and educational institutes, we believe that telecommunications provide a foundation for the digital services industry.
• Considering the sharp decline of Chinese Telcos P/E ratio as compared to the U.S. counterparts and relatively stable share price when COVID-19 outbreak was growing in China (Jan 22 – Feb 19), we believe that Chinese Telcos are undervalued and should recover as the containment efforts of COVID-19 find success.
• Trefis highlights the potential growth trajectory of COVID-19 cases in the U.S. in a dashboard, ‘Coronavirus Trends Across Countries, And What It Means For The U.S.’

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