CHLKF - China Mobile: Growth And Stability From This 7% Yielding Stock

2023-03-30 14:57:40 ET

Summary

• China Mobile is not for every investor as some might be unable to own it.
• It is fundamentally sound and should continue to grow earnings going forward.
• A shareholder-friendly distribution policy helps ensure that all owners take part in their profitable business.

Investment thesis

We like to have a certain portion of our portfolio in the telecom sector, as it is a vital industry. More important than food, if you have a teenager in the house. They cannot survive without their internet and mobile phone.

In our last article on Taiwan's leading telecom company Chunghwa Telecom (CHT) we concluded that although TCM is growing, we saw more potential from our two positions namely China Mobile (CHL) ( CHLKF ) and Singtel ( SGAPY ).

It was especially China Mobile that we liked the most.

This article is about China Mobile.

Introduction to China Mobile

China Mobile's controlling shareholder is ultimately the Chinese government.

It has 975 million mobile phone customers and 272 million internet broadband customers.

By revenue, it ranked as the world's fourth largest according to data from 2020.

In 2020, the then-sitting U.S. President Donald Trump issued an executive order prohibiting any American company or individual from owning shares in companies that the United States Department of Defense has listed as having links to the People's Liberation Army, which included China Mobile.

China Mobile was delisted from the United States in 2021 after a Trump-era decision to restrict investments in Chinese technology firms. That ruling has been left unchanged by the Biden administration amid continuing tensions between the two nations.

For non-U.S. citizens, they can buy and own the H shares in China Mobile either on the Hong Kong Stock Exchange or the A shares on the Shanghai Stock Exchange.

2022 FY financial results

We just received the 2022 FY financial results from China Mobile and the numbers impressed us since we knew that the economy suffered with lockdowns and curtailed activities last year.

Fortunately for China Mobile, their customers spent more money on their internet and mobile phone bills. Its revenue for 2022 was up 10.5% to RMB 937.3 billion, which equals about $138.3 billion.

Of the 975 million mobile customers as much as 65% of them have 5G package solutions. An important figure in the telecom industry is the Average Revenue Per Unit or ARPU. In 2022, China Mobile grew its ARPU by 0.4% to RMB 49 year-on-year.

From their internet business, the wireline broadband customers were 272 million, of which 89% come from private consumers, The ARPU for broadband increased by 5.8% year-on-year to RMB 42.1

EPS for the year 2022 was RMB 5.88 per share. This equals HKD 6.81.

The P/E is a reasonable 9.16

Return of capital to shareholders

The Board has recommended a dividend payout ratio of 67% for the full year of 2022, and a total dividend of HK$4.41 per share This is an increase of 8.6% year-on-year.

Based on the present share price of HKD 62.35 it gives us a TTM dividend yield of 7.1% before taxes. There is a 15% withholding tax on mainland Chinese companies listed in Hong Kong.

China Mobile has a good track record of growing its dividends over the years.

Here is their dividend history

How does their dividend yield compare with some of the other large telecom companies in the world?

Balance sheet

It is no secret that we like companies with little debt on their balance sheet. In hard economic times, that is always a good thing. When was the last time you heard of a company with low or no debt that went bankrupt? I cannot remember any.

Most telecom companies do have quite a lot of debt. It is a capital-intensive industry. How about China Mobile?

Here is a comparison with the same peers.

Conclusion

The price of China Mobile's H share has gone up 12.8% over the last year. That is quite good if we compare it to the 8% that the Hang Seng Index is down and the 13% down that the S&P500 has recorded in the same period.

It also has an attractive Price/NAV of just 0.87

Our stance on China Mobile is that of a Buy as we believe they can continue to grow their ARPU going forward. A shareholder-friendly dividend policy will also ensure that all owners of the company get to benefit from their profits.

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