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. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Stock Analysis

    4 Things to Watch in the Cable Industry's Consolidation

    Learn about the high-profile purchases being made of cable companies and how these signal the future consolidation of the cable industry.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  7. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  8. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  9. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  10. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

You May Also Like

Trading Center