Download CHL 11-08

Ticker: CHL
Sector:
Telecom
Industry: MobileTelecom
Recommendation:
Watch (Don’t Buy)
Pricing: 11-07-07
Closing Price $88.16
52-wk High
$104.00
52-wk Low
$39.20
Stop-Loss(.02% por)~80.00
Market Data
Market Cap
Total assets
$354.02B
$544.26B
Valuation
EPS (ttm)
P/E (ttm)
PEG
Div Yield
$2.44
36.06
1.36
1.20%
Profitability &
Effectiveness (ttm)
ROA
13.98%
ROE
23.21%
Profit Margin 22.70%
Oper Margin 34.52%
Debt/Equity
Matthew J Wagner
[email protected]
1
China Mobile Ltd.
China Mobile Limited, formerly China Mobile (Hong Kong) Limited, is
an investment holding company. The Company provides mobile
telecommunications and related services in 31 provinces, autonomous
regions and directly administered municipalities in Mainland China and
Hong Kong through 32 subsidiaries. As of December 31, 2006, China
Mobile Limited had an aggregate mobile telecommunications subscriber
base of over 301.2 million. Its global system for mobile communications
(GSM) global roaming services covered 219 countries and regions and
its general packet radio service (GPRS) roaming services covered 138
countries and regions. On March 28, 2006, it acquired China Resources
Peoples Telephone Company Limited and subsequently changed its
name to China Mobile Peoples Telephone Company Limited (Peoples).
In May 2007, China Mobile Communications Corporation, the
controller of China Mobile Ltd, acquired Pakistan telecommunications
operator, Paktel Ltd. Paktel Ltd was renamed as CMPak Ltd.1
It is the largest mobile phone provider in the world by subscriber. Its
one competitor, China Unicom only comprises about 34% of the market
and has a market cap of about $26B compared to China Mobile’s market
cap of $354B. This serves as one of its competitive advantages, but this
is not the only advantage. According to Business Week, CHL has the
strongest Chinese brand out of 20 of the largest brands in the PRC. Due
to its size and first mover advantage the company stands at the forefront
of the mobile telecom industry in China. In 2006 the company was able
to achieve the largest subscriber base in the world with over 300 million
phone users in its network. This was made possible by its integration of
a low cost option to rural areas of China. These options mainly focus on
prepaid services and meet the need of the lower income demographic by
providing just the amount that they need and can afford. Mostly all of
the growth in the telecom industry in China is expected to come from
this rural demographic.
http://finance.google.com/finance?q=NYSE:CHL
1
Company Growth:
The company grew its subscriber base by 22.1% from 2005 to 2006 and nine months into 2007
they have already grown the customer base 14%, putting them on track for another 20% or so
growth this year. You may note that most of this growth is in the prepaid subscriber which
potentially leaves room for competitors to pick up some of the residual business. A noteworthy
point would be the difference in market competition between China and the United States. Here
mobile phone companies try and lock in customers due to the commoditization of their products.
In China, CHL has one competitor which does not even offer a low cost alternative to the lower
income demographic. They essentially have a monopoly on the market. This could change if the
Chinese market begins to open up to more outside investors and the market becomes more
efficient through competition. Until that time, CHL should remain the dominant player in the
industry, establishing first mover advantage and building its brand reputation ahead of any future
competition.
2
2
2006 Annual Report Presentation
2
The slides don’t quite capture the big picture of growth. The company is adding around 4.43
million subscribers per month.
Risks:
Hong Kong Market up 52% ttm while GDP has grown only 26.4% in first 3 Quarters of 2007.3
More countries opened up to Chinese investors would give new opportunities to those investors
and take a lot of headway out of the strong bull market in China and shift it to other parts of the
globe. This would have a negative effect on Chinese equity securities due to the large value put
on them because of over demand in the market.
Increased competition into the heavily regulated Chinese market; specifically a low cost strategy
from an existing rival or new entrant could take some of the growth potential out of CHL’s sails.
Competitors:
CHL only has one competitor in the Chinese market which is China Unicom. The following
table gives a quick comparison:
CHL
CHU
Industry
Market Cap:
352.70B
26.55B
Employ-ees:
118,703
53,120
442
Qtrly Rev Growth (yoy):
21.60%
6.30%
19.20%
486.32M
615.86M
Revenue (ttm):
43.59B
13.17B
Gross Margin (ttm):
92.80%
74.46%
46.78%
EBITDA (ttm):
23.04B
4.45B
101.86M
Oper Margins (ttm):
34.52%
10.95%
5.31%
9.89B
624.36M
EPS (ttm):
2.45
0.48
-1.19M
N/A
P/E (ttm):
22.96
Net Income (ttm):
35.98
42.12
PEG (5 yr expected):
1.36
1.38
1.8
P/S (ttm):
8.45
2.06
1.93
Pvt1 = China Telecommunications Corporation (privately
4
CHU = China Unicom Ltd.
CHU markets to the high end user while CHL is growing into rural areas and expanding its
customer base through non-contractual sales (prepaid services).
3
4
http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY&File=10252007070321.htm
http://finance.yahoo.com/q/co?s=CHL
3
Valuation:
I used the Warren Buffett Owner Earnings Model to evaluate the price of CHL.
Assumptions:
I calculated a sustainable growth rate using retention ratio x ROE = ~14%
Rf – 3.901% (90 day T-bill)
Rm – 10.23%
Beta: 1.35 (average of Google 1.4 and Yahoo 1.3)
CAPM (k) - ~12%
assuming discount rate (k) of
Owner Earnings
Net Income
Depreciation & Amortization
Change in A/R
Change in A/P
Capital Expenditures
Owner Earnings
12.00%
$
$
$
$
$
$
(k) Sensitivity
8%
9%
10%
11%
12%
8,878.00
8,671.00
(578.00)
880.00
(10,335.00)
7,516.00
36.96
66.26
54.25
46.42
40.96
36.96
Year:
Prior Year Owner Earnings
First Stage Growth Rate (add)
Owner Earnings
Discounted Value per annum
$
$
Sum of present value of owner earnings
Residual Value
Owner Earnings Last Super G Yr
Second Stage Growth Rate (g) (add)
OE at time 1
Capitalization rate (k-g)
Value of Residual
Present Value of Residual
Intrinsic Value of Company
Current Value of Equity
Shares outstanding assuming dilution
2007
7,516.0 $
14.0%
8,568.2 $
$8,568.2
2008
8,568.2 $
14.0%
9,767.8 $
$8,721.2
2009
9,767.8
14.0%
11,135.3
$8,877.0
2010
11,135.28 $
14.0%
12,694.22
9,035.50
$44,398.8
1st Stage (g)
$
$
$
14,471.4
4.00%
15,050.3
8.00%
188,128.41
15%
20%
25%
36.96
37.94
43.30
49.53
$60,572.31
$104,971.12
42886
4,000
Exchange Rate of .1343 yuan (RMB) to $1
Intrinsic Value per share
$36.96
Matthew J. Wagner
F7620
China Mobil
Even at analyst predictions of 24% growth for the next five years the stock is still way
overvalued at any of my assumption levels.
4
2011
12,694.2
14.0%
14,471.42
9,196.85
Other Analyst Opinions:
Average Recommendation:
Number of Ratings:
FY Report Date:
Last Quarter's Earnings:
Year Ago Earnings:
HOLD
20
12 / 2007
n/a
4.31
Average Target Price:
59.28
Current Quarters Estimate:
2.18
Current Year's Estimate:
4.06
PE on CY Estimate:
13.86
Next Fiscal Year Estimate:
4.08
PE on Next FY Estimate:
13.80
5
Mean Target:
82.91
Median Target:
94.00
High Target:
115.00
Low Target:
40.00
No. of Brokers:
5
6
Current Qtr.
N/A
N/A
N/A
N/A
Next Qtr.
N/A
N/A
N/A
N/A
This Year
35.7%
N/A
N/A
N/A
Next Year
31.3%
N/A
N/A
N/A
Past 5 Years (per annum)
17.9%
N/A
N/A
N/A
Next 5 Years (per annum)
24.12%
N/A
N/A
N/A
Price/Earnings (avg. for comparison categories)
32.76
N/A
N/A
N/A
PEG Ratio (avg. for comparison categories)
1.36
N/A
N/A
N/A
Recommendation:
I feel the company is currently overvalued and may become attractive at the 50-60 USD range.
The company is performing very strong, but the stock might be heavily speculated in due to the
over demand in its home market. I am not sophisticated enough to value that speculative growth
and therefore would not buy this stock for myself.
5
6
http://www.marketwatch.com/tools/quotes/snapshot.asp?symb=CN&pg=analyst
http://finance.yahoo.com/q/ao?s=CHL
5
Appendix: Industry Comparison (Global)
Description
Technology
Wireless Communications
AeroTelesis Inc.
Airspan Networks Inc.
Airvana, Inc.
Alltel Corp.
Alvarion Ltd.
Ambient Corporation
America Movil S.A.B. de C.V.
Anaren Inc.
ARC Wireless Solutions Inc.
AskMeNow, Inc.
Associated Media Holdings Inc.
ATSI Communications Inc.
Axesstel Inc.
Berliner Communications Inc.
Broadcast International Inc.
Cellcom Israel Ltd.
Centennial Communications
Corp
China GrenTech Corp. Ltd.
China Mobile Limited
China Unicom Ltd.
CoConnect, Inc.
Conectisys Corp.
Continan Communications, Inc.
Cortelco Systems Puerto Rico I
Deutsche Telekom AG
Diamond I, Inc.
ERF Wireless, Inc.
FiberNet Telecom Group Inc.
FiberTower Corporation
Fusion Telecommunications Inte
GigaBeam Corporation
Globalstar Inc.
GoAmerica Inc.
Golden Telecom Inc.
I2 Telecom International, Inc.
Ibroadband Inc
ICO Global Communications
(Hol
Interact Holdings Group, Inc.
Market
Cap
6308.31B
1129.59B
NA
91.52M
438.28M
24.51B
693.87M
7.60M
108.51B
256.84M
NA
NA
NA
10.52M
16.03M
NA
P/E
38.595
0
NA
NA
6.641
27.475
NA
NA
22.298
18.591
NA
NA
NA
NA
NA
NA
ROE
14.458
0
NA
-57.872
NA
7.457
-0.965
-393.83
39.383
9.058
-6.601
NA
NA
NA
-6.893
22.096
Div
Yield
1.769
2.165
NA
NA
NA
0.7
NA
NA
3.6
NA
NA
NA
NA
NA
NA
NA
D/E
0.915
0.441
NA
0.171
0.1
0.226
NA
NA
0.649
NA
0.081
NA
NA
NA
0.432
1.788
P/B
28.008
110.76
NA
1.718
NA
2.053
3.363
NA
7.742
1.581
NA
NA
NA
NA
1.818
NA
88.63M
2.72B
NA
16.603
NA
127.255
NA
6.2
NA
3.787
NA
12.687
1.09B
9.22M
352.21B
27.07B
NA
NA
NA
1.89M
88.06B
NA
56.32M
58.31M
NA
13.76M
NA
0.59
36.082
42.958
NA
NA
NA
22.222
28.451
NA
NA
NA
NA
NA
NA
8.073
23.212
5.389
NA
NA
NA
4.759
4.688
-340.01
NA
-14.611
-23.776
-80.759
0
NA
1
1
NA
NA
NA
NA
3.8
NA
NA
NA
NA
NA
NA
0.384
0.107
0.043
NA
NA
NA
NA
1.034
0.1
NA
0.344
0.652
0.104
NA
0.046
7.682
2.161
NA
NA
NA
1.051
1.377
NA
NA
1.431
NA
1.054
NA
620.48M
15.05M
4.02B
18.86M
NA
NA
NA
NA
39.701
NA
NA
-244.03
-4.877
-15.86
10.791
NA
NA
NA
NA
NA
0.8
NA
NA
0.21
0.002
0.017
0.246
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Net
Profit
Margin
(mrq)
9.065
-2.7
NA
-52.897
55.103
12.387
1.025
NA
14.272
9.593
5.074
NA
NA
1.035
0.974
0.877
159.705
14.56
Price To
Free
Cash
Flow
(mrq)
-43.751
712
NA
-15.409
NA
49.398
-487.569
-23.068
NA
30.535
NA
NA
NA
50.508
4.156
NA
-35.66
35.459
-920.134
-0.506
358.004
11.584
NA
NA
NA
5.996
42.5
NA
-1134.88
35.335
NA
NA
NA
1.981
1.521
3.899
NA
NA
2.325
7.966
22.756
11.95
NA
NA
NA
2.979
3.904
NA
-53.589
-8.623
NA
-12.954
111.903
-49.104
-18.258
10.839
NA
-58.69
NA
NA
NA
-83.844
NA
NA
6
NA
-21.376
25.172
-324.285
55.92
NA
InterDigital, Inc.
InZon Corporation
iPCS Inc.
IXI Mobile, Inc.
Knology, Inc.
LCC International Inc.
Leap Wireless International In
Legend Mobile Inc.
Linktone Ltd.
Maxcom Telecomunicaciones,
S.A
MedLink International, Inc.
MetroPCS Communications Inc.
Mobile Telesystems OJSC
1.02B
5.58M
566.60M
NA
554.29M
76.68M
4.37B
NA
81.40M
26.232
NA
NA
NA
NA
NA
NA
NA
NA
19.021
NA
NA
NA
-615.57
-5.283
-2.04
NA
-5.778
NA
NA
0
NA
NA
NA
NA
NA
NA
0.1
NA
NA
NA
NA
0.077
1.136
NA
NA
6.612
NA
NA
NA
NA
1.393
2.419
NA
0.964
15.415
NA
-32.758
NA
-35.826
-7.599
0.826
NA
-28.562
638.749
-54.828
-130.047
NA
27.936
NA
-203.322
NA
NA
402.25M
NA
7.50B
33.66B
NA
NA
65.378
21.819
-1.913
NA
7.845
40.816
NA
NA
NA
0
0.869
NA
1.679
0.686
1.959
NA
4.075
7.699
-14.306
NA
-108.965
26.495
NB Telecom, Inc.
Nettel Holdings Inc.
NII Holdings Inc.
NTELOS Holdings Corp.
NTT DoCoMo, Inc.
Partner Communications Co.
Ltd
PCTEL Inc.
Portugal Telecom SGPS SA
Proxim Wireless Corporation
Qiao Xing Mobile
Communication
RCN Corp.
NA
14.96M
9.86B
1.26B
65.42B
NA
NA
28.416
40.928
19.228
NA
NA
25.061
19.685
9.382
NA
NA
NA
2.8
0
NA
1.252
1.181
3.622
0.119
NA
100
5.23
7.398
1.777
-1.42
NA
10.54
25.799
240.577
-31.69
9.567
8.729
10.829
3.09B
188.52M
14.12B
35.94M
15.793
53.718
11.453
NA
62.197
2.855
48.048
-51.082
6.6
NA
3.8
NA
1.586
0.01
2.424
NA
8.345
1.653
4.855
1.045
15.545
3.155
16.889
-1.783
119.799
NA
NA
-10.275
475.83M
533.67M
NA
NA
NA
-38.089
NA
0
0.279
2.773
1.491
2.816
NA
94.317
NA
688.77M
3.98B
48.42B
NA
99.59M
NA
NA
NA
369.783
NA
8.531
NA
NA
-25.036
0.255
NA
43.836
NA
NA
NA
0.6
NA
NA
NA
NA
8.111
0.432
3.884
0.119
NA
NA
16.909
0.948
NA
2.977
23.458
-50.118
157.766
-10.244
-15.028
0.637
-79.598
23.159
NA
130.751
155.737
35.116
NA
30.299
16.92B
1.10B
8.00B
1.47M
126.72M
18.46B
NA
10.02M
20.62B
8.03B
NA
452.06M
357.82M
30.96B
599.92M
8.05B
11.003
12.426
47.577
NA
NA
17.695
NA
0.331
17.968
25.935
NA
8.363
NA
28.09
NA
25.339
25.902
13.368
4.624
NA
-14.85
14.92
NA
0.653
30.738
10.459
-22.672
11.837
-24.64
29.799
NA
6.883
2.3
1.6
0.6
NA
NA
2.5
NA
2.2
2
NA
NA
22.1
NA
0.9
NA
0
0.185
0.127
0.429
NA
NA
0.727
NA
0.291
0.158
0.32
0.02
NA
0.527
0.594
NA
0.449
2.702
1.587
2.096
NA
3.458
2.61
NA
0.002
4.636
2.564
NA
1.033
0.495
7.178
NA
1.71
16.442
13.979
-0.723
-0.248
1.958
11.359
-32.46
1.112
18.199
15.188
-91.969
19.261
-11.464
20.922
3.384
-3.732
NA
NA
10.66
63.376
32.114
55.405
NA
-0.046
-45.918
-34.305
NA
22.295
-13.472
40.617
-68.762
NA
Remote Dynamics, Inc.
Rural Cellular Corp.
SBA Communications Corp.
Sprint Nextel Corp.
SunCom Wireless Holdings Inc.
T-Bay Holdings, Inc.
Telecomunicacoes de Sao
Paulo
Telemig Celular Participacoes
Telephone & Data Systems Inc.
Teleplus World, Corp.
Telular Corp.
TELUS Corporation
TetriDyn Solutions, Inc.
TIM Participacoes SA
Turkcell Iletisim Hizmetleri A
United States Cellular Corp.
UpSNAP Inc.
USA Mobility Inc.
UTStarcom Inc.
Vimpel-Communications
Virgin Mobile USA, Inc.
Vivo Participacoes S.A.
7
NA
-10.641
NA
81.761
54.743
Vodafone Group plc
Wavecom SA
XO Holdings, Inc.
5G Wireless Communications
Inc
207.96B
341.10M
609.95M
NA
18.675
NA
-6.472
18.24
-26.674
4.5
NA
NA
0.337
0.991
1.033
1.484
2.949
5.688
NA
NA
NA
NA
NA
NA
-2.07
6.386
-10.306
163.238
8
69.192
32.741
-19.794
NA