Tuesday, September 14, 2010

A Chinese Telecom Stock With Lots Of Cash

What company is the most valuable telecommunications company in the world? It’s not Verizon, Sprint, AT&T or T-Mobile. The answer is China Mobile (CHL). China Mobile has a market cap of $200 billion dollars and over half a billion customers. China Mobile is unique in that it is a publicly listed state owned enterprise. 74.22% of China Mobile is owned by the Peoples Republic of China. This leaves a 25.78% ownership interest for the general public.

China Mobile has a virtual lock on then entire mobile market in China. The company has a 70.6% market share in mainland China. The company’s vast network covers almost all of China. The company’s services include local calls, domestic long distance calls, international long distance calls and international roaming. China Mobile was voted the best managed company on the Asian continent by FinanceAsia.

There is a lot to like about China Mobile. The company has an incredible balance sheet with $46.8 billion dollars in cash and only $4.97 billion dollars in debt. The company has $11.68 per share in cash alone. China Mobile generates a remarkable $32 billion dollars in free cash flow.

The company has incredible operating margins. The operating margin is at 33% which is well above the industry average of 6%. Gross margins are at 84% which is nearly double the average of Chinese competitors. The profit margin is a healthy 25%. Earnings have exploded over the past 5 years with sales growing 28.5% over the next 5 years. Obviously the company will have trouble approaching these numbers with such a huge market capitalization.

The stock is currently yielding 3.4% which is a reasonable yield. The current payout rate is 38% which is easily maintainable for the earnings giant. Even at $50 per share, the stock looks like a great value. The company currently trades at just under 12 times earnings which is less than half of the P/E ratio of industry competitors. The biggest threat to the company would be a loss of market share due to increased competition.

Value investors should consider buying shares if the stock pulls back to the mid $40's.

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