China Mobile’s Sagging Profit: Time To Buy?

China Mobile: Time to buy?

I don’t usually offer direct investment advice in this space, but today I can’t resist opining that perhaps investors are being a bit hasty in dumping shares of China Mobile (HKEx: 941; NYSE: CHL) after the nation’s dominant wireless carrier reported its first annual profit decline in more than a decade. The decline shouldn’t come as a huge surprise, since China Mobile reported an 8.8 percent profit decline in the third quarter. Obviously falling profits are never something investors want to see. But in this case it’s also worth noting that China Mobile has responded to the challenge with a number of new initiatives that show it is finally waking up to a new reality where it faces growing competition from the private sector.

China Mobile’s stock fell 6.5 percent after it posted its latest results, in which it reported its profit fell 5.9 percent in 2013 to 121.7 billion yuan ($20 billion). (company announcement) The sell-off in its shares after the results came out took China Mobile’s stock to lows not seen since 2009 during the global financial crisis. That means China Mobile’s stock now trades at the low price-to-earnings (P/E) ratio of about 8, or well below the levels for rivals China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA).

So now that I’ve given all the negative news, let’s look at some of the reasons why there’s still hope for this lagging industry giant. While profit was down, it’s also worth noting that revenue for the year continued to grow by a strong 8.3 percent to 630 billion yuan. That means that the company is still growing at a healthy rate, which isn’t always easy for a telco of China Mobile’s size.

The profit drop obviously owes at least partly to price cutting due to stiff competition, especially from private sector players like Internet giant Tencent (HKEx: 700), whose popular WeChat is rapidly stealing business from China Mobile’s traditional text messaging service. But the profit decline also reflects the fact that China Mobile is finally waking up to a new competitive landscape, and is making investments to improve its position.

One of the biggest investments has been in 4G, with China Mobile spending billions of dollars to build up a new network that it launched late last year. The company revealed that it already has 1.34 million 4G users 3 months after the launch, which isn’t too bad considering the service’s newness. (Chinese article) It also added its aggressive target of signing up 50 million 4G users this year, quite an aggressive target that means it will have to spend heavily on promotions. (Chinese article)

But anyone who follows the mobile sector knows that simply signing up new subscribers is no longer the formula for success that it used to be. Instead, the big money will come from offering new “over the top” (OTT) services, which most often come as mobile apps for products and services like e-commerce and games. China Mobile was typically a laggard in that area, which allowed companies like Tencent and Alibaba to take more initiative and steal new business opportunities.

But lately China Mobile has shown a bit more initiative in developing new services. It is working hard to develop rival products in messaging and e-commerce (previous post), and recently co-hosted a successful video event with leading Internet video site Youku Tudou (NYSE: YOKU). (previous post) Obviously there’s no guarantee that any of these new products will succeed, especially since all these segments are very competitive. But if China Mobile can develop some compelling offerings, it could easily use its natural advantage as the nation’s dominant telco to quickly win some big new business in the growing market for mobile products and services.

Bottom line: China Mobile’s stock could be oversold following its latest disappointing earnings, and its profits could be set for a rebound in 2015 if a series of new initiatives do well.

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