Investors Are Selling China Mobile for the Wrong Reasons

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China Mobile (NYSE: CHL), the largest wireless carrier in China, serves over 930 million mobile customers and nearly 170 million wireline customers. That massive customer base, along with the government's backing and a 4% dividend, made it a fairly conservative play on China's growth.

However, China Mobile's stock slid nearly 20% over the past three months following a lackluster annual report in late March and the escalation of trade tensions between the U.S. and China. In May, the sell-off intensified after the FCC blocked China Mobile's bid to provide telco services in the U.S.

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China Mobile's short-term outlook looks mixed, but investors who are selling the stock due to its recent expenses, the trade war, and the FCC ruling could be making a big mistake. I'll explain why those three headwinds aren't as severe as they might seem.

Its higher expenses are temporary

China Mobile's operating revenue rose 2% in 2018, and its net profit grew 3%. Those growth figures look stable, but its profit was buoyed by the IPO of China Tower last August. Excluding that gain, its profit fell 9%.

China Mobile's earnings were throttled by three factors. First, competition and the saturation of the smartphone market curbed the pricing power of all three state-backed telcos: China Mobile, China Telecom, and China Unicom.

Second, the government forced all three telcos to slash their wireless fees, eliminate data roaming charges, and provide faster wireline connections at lower prices to boost the nation's internet penetration rate.

Lastly, ongoing 5G network upgrades boosted operating expenses at all three carriers. Those costs were partly offset by the 2015 deal with China Tower, in which all three carriers sold their towers to the company and leased them back to cut costs.

The saturation of China's smartphone market, which posted a 14% drop in shipments in 2018 (Canalys), will remain a major headwind. However, the price reductions and 5G network costs are near-term pressures that should ease over the long term. A fully upgraded 5G network will also enable China Mobile to grow its wireless revenue as 3G and 4G subscribers upgrade their plans.

China Mobile's supply chain remains stable

The Trump Administration's war against Huawei and its restrictions on sales of U.S. tech products to Chinese companies sparked concerns about China Mobile's supply chain. Some of those concerns were justified, since Huawei and ZTE, which was targeted by U.S. regulators last year, are major telecom equipment suppliers for China Mobile's 5G networks.

However, China Mobile also buys equipment from Finnish telecom equipment giant Nokia, which is well insulated from any trade disputes between the U.S. and China. If Huawei and ZTE get their wings clipped, China Mobile can mitigate the impact by pivoting its supply chain toward Nokia.

The FCC denial was old news

Some media outlets treated the FCC's denial of China Mobile's U.S. license as a new development last month. However, China Mobile initially applied for that license in 2011, and the approval remained in limbo under the Obama Administration because of national security concerns.

Last summer, the Trump Administration stated that it would ask the FCC to formally block China Mobile's application, so the recent development shouldn't have surprised investors. Moreover, it's highly unlikely that China Mobile could have gained a meaningful foothold in the saturated U.S. smartphone market dominated by AT&T, Verizon, T-Mobile, and Sprint.

Japanese telco SoftBank previously attempted to crack the market by taking a majority stake in Sprint in 2012, but Sprint remained a laggard, and the investment became an unprofitable money pit. Therefore, the FCC probably did China Mobile a favor by blocking its American expansion -- which likely was no longer a priority as it expanded its 5G network across China.

Maintaining a long-term view

China Mobile's stock probably won't rally anytime soon, but I think investors are dumping the stock for the wrong reasons. It still pays a decent dividend, it trades at just 10 times earnings, and it remains one of the best long-term plays on China's mobile market -- which should survive regardless of how long the trade war drags on.

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Leo Sun owns shares of AT&T and China Mobile. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.