Investors may be frustrated with some of the decisions that China Mobile (NYSE:CHL) management has made in recent years, but at least they can say that the company is what it is – a leading wireless service provider focused exclusively on China and built around generating solid and predictable returns on capital and free cash flow. With that in mind, China Mobile looks like a solid investment pick, particularly for those investors looking for above-average dividend potential. Will 4G Justify The Investment?China Mobile has been ramping up its 4G network plans, and spending on this rollout is likely to be a key story over the next couple of years. Management has targeted having 200,000 base stations in 100 cities by the end of the year, with an official launch of service either late this year or early next. Assuming the company keeps to that schedule, it should provide an effective one- or two-year headstart. SEE: How To Pick The Best Telecom StocksThe question for investors, though, is whether China Mobile will reap significant ROI on this rollout. The company's 2G network is still the cash cow for the company, providing the majority of its operating cash flow and supporting over 80% of its subscriber base. By comparison, the 3G network has largely been an albatross. Whether its fair to blame company missteps, government regulatory intrusions, or competition from China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU) is to some extent moot – utilization/penetration has been relatively poor and the company's share lead in 3G is considerably narrower. 4G service should offer higher ARPU and it seems reasonable that most of those 2G subs will want to upgrade at some point. On the other hand, it's unclear what China Mobile's rivals are going to do with their 4G plans, with China Unicom seemingly suggesting that upgrading its 3G network is a better near-term option. Staying A Pure-Play On ChinaUnlike almost every other mobile service provider of any size, China Mobile has been content to stay within its borders. The company had been exploring a joint bid with Vodafone (NYSE:VOD) for a license in Myanmar (Burma), likely the last growth market in Asia, but pulled out due to concerns about the probable return on the investment. That's good and bad news for investors. It's hard to argue that global expansion and diversification hasn't helped carriers like Telefonica (NYSE:TEF), Bharti, or France Telecom's (NYSE:FTE) Orange. Likewise, a single-company focus leaves the company highly vulnerable to regulatory interference designed to improve competition. On the other hand, China is so large and China Mobile is so large within the Chinese market that China was always going to dominate the story here. What's more, the state's ownership stake in this company doesn't make it an appealing operator in many countries. Last and not least, the company's investment discipline is not such a bad thing. Many telco providers have piled into countries to chase growth, only to find that the actual returns on the investment are poor and destroy shareholder value. For China Mobile to resist the temptation to grow and focus on long-term returns is a positive in my book. Still A Top OperatorBeing a state-owned service provider in a regulated market in a country with a tenuous sense of free market competition would normally sound like a lousy proposition for investors. And yet, China Mobile's management makes it work. It's true that the 3G network hasn't panned out, but the company's marketing efforts are still paying off to some extent (with 44% of the net 3G adds in China in April) and the company boasts a very good return on invested capital for the sector and a very stable payout ratio (43% for seven years running). The Bottom LineThe Chinese government has no particular desire to see China Mobile hold any more share of the overall telecom market, so overall net sub adds are not likely to be a large part of the story. That said, converting subs from 2G or 3G to 4G could offer respectable growth opportunities. To that end, I think the company can maintain long-term growth in the mid single digits. Free cash flow will get compressed over the next year or two for the 4G rollout, but I expect the company to continue producing very strong free cash flow margins. Feeding that all into a DCF model, fair value for the shares would seem to be in the low-to-mid $60s, which when coupled with a dividend yield above 4% makes this a worthwhile stock for investors to consider.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. BlackBerry Ltd

    Blackberry – formerly known as Research in Motion (RIM) – is ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Android Operating System

    A mobile operating system developed by Google. The Android operating ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. Has increased data usage affected the telecommunications sector in developed countries?

    The big news in the telecommunications sector for developed nations is bigger, cheaper data. Global data traffic is expected ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!