China Mobile Ltd. (ADR) (NYSE:CHL), which is the world’s largest mobile operator, had a lackluster quarter. And yes, Wall Street is in the sell mode, dropping CHL stock more than 4% after earnings were announced.
Fourth-quarter revenues for China Mobile dropped by 4.2% to $25.8 billion (160.2 billion yuan). Earnings fell 12% to $4.3 billion (26.7 billion yuan). As for the year, the situation was not so good either. Profits were down by 10.2% to $17.5 billion (109.3 billion yuan), which was CHL’s worst performance since 1999, and sales inched up by only 1.8% to $103.3 billion (641.4 billion yuan).
Analysts had been expecting profits for CHL of $17.5 billion (108.6 billion yuan) and revenues of $104.1 billion (646.2 billion yuan).
OK, so what’s going on here? Well, CHL has been investing heavily in its 4G platform. Keep in mind that the focus has been on using cutting-edge technologies, allowing for high-speed access for customers. By the end of this year, the coverage area is also expected to be more than 1 billion people.
Of course, all this has been critical for the October launch of the Apple Inc. (NASDAQ:AAPL) iPhone. To this end, CHL also ramped spending on marketing and promotions.
Even though it has not been easy to convert 2G users to the 4G network — or get them to spend more money on data — China Mobile has still built an impressive footprint. There are now more than 90 million 4G customers (up from about 1.4 million a year ago) and more than 100 million handsets have been sold.
However, the overall mobile market has seen more competition lately, such as from China Telecom Corporation Limited ADR (NYSE:CHA) and China Unicom (Hong Kong) Limited ADR (NYSE:CHU), which have also been boosting their 4G expenditures. The Chinese government also has been taking initiatives to help promote more competition in the mobile market.
As for CHL stock, a key attraction is the dividend yield, which is currently at about 2.7%. The valuation on the stock is also reasonable, at about 14 times earnings. In comparison, AT&T Inc. (NYSE:T) is at 27x and Verizon Communications Inc. (NYSE:VZ) trades at 20x. And these companies are in a market that is highly saturated.
But this is not the case in China. Consider that the number of mobile phone users is projected to climb from nearly 1.1 billion in 2014 to 1.24 billion in 2018. No doubt, CHL should get a nice chunk of this, as it will have the advantages of an advanced 4G network and extensive scale.
So even though the company does face competition and issues with the transition to 4G, the long-term prospects for CHL still look attractive, especially with the respectable dividend and reasonable valuation.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
