Should You Buy Chinese Telecom Stocks?

by Jim Woods | February 28, 2014 2:03 pm

The growth story that is China has been a strong investment theme for most of the past decade. In recent years, however, the slowdown in the rate of China’s GDP growth has caused a lot of investor assets to bailout of the sector.

The China exodus can be seen in stocks that makeup China’s benchmark index ETF, the iShares China Large-Cap (FXI[1]), which is down about 10% over the past 12 months. So far in 2014, FXI has fallen more than 6%.

The decline in the overall China equity market is amplified when we look at stocks in the once high-flying Chinese telecom segment.

For example, China Mobile (CHL[2]), which also happens to be the biggest wireless service provider on the planet, has seen its shares sink more than 13% during the past 12 months. That drop includes an 8.3% year-to-date plunge in CHL stock.

The CHL stock plunge is particularly disconcerting for sector bulls, especially considering the company just reported that its subscriber count vaulted to roughly 772 million at the end of January. That means China Mobile has more than double the number of subscribers than the total U.S. population.

The CHL stock drop also comes despite the much ballyhooed deal with Apple (AAPL[3]) that makes the company’s iPhone 5 models available on China Mobile’s wireless network, and for purchase through China Mobile’s massive retail distribution network.

One industry watcher recently expressed his concern to me privately, saying that if Apple can’t light a fuse under CHL shares, “What will?”

The story of woe is the same for other stocks in the China telecom space.

China Telecom (CHA[4]) has seen its shares fall more than 16% over the past year, with much of that coming in 2014. China Unicom (CHU[5]) stock has slumped 9% in the past 52 weeks, thanks to a 12% decline year-to-date.

Now, however, there are some rumblings in the space that because of what is perceived as an attractive valuation in all three Chinese telecoms — CHL stock at a P/E of 9.2 while CHA stock has a P/E of 13.4 and CHU stock a P/E of 19.3 — the shares are a good buy here.

Moreover, the recent drop in price also could put traders in a position to take advantage of any move in the space, or in the overall Chinese equity market.

While both the valuation and trading bounce arguments for buying Chinese telecoms certainly have some merit, there are a few other factors that JPMorgan analysts Lucy Liu, Michelle Wei and James R. Sullivan cited in a recent note to clients[6] arguing in favor of investors avoiding the sector despite the cheap price tags:

“Valuation is not trustworthy, given low earnings visibility, due to unknown 4G competition and VAT reform impacts. Meanwhile, various structural issues still linger in the sector with little positive catalysts, despite being increasingly understood by the market. We choose to stay on the sidelines until more clarity can be obtained on earnings, and signs of a turnaround in structural problems start to appear.”

If you’re an intrepid type who isn’t afraid to roll the dice and wait for a rebound, then CHL stock, CHA and CHU might be worth a nibble at these beaten-down levels. Dividends as protection also bolsters the case for two of the stocks — CHL yields a whopping 4.7% and CHA yields a more modest but still appealing 2.5%. CHU’s payout is on the skimpier side at 1.5%.

However, if you are more interested in strong companies with strong growth and proven recent share-price performance, then the China telecom space probably won’t be your cup of tea.

As of this writing, Jim Woods was long AAPL.

  1. FXI:
  2. CHL:
  3. AAPL:
  4. CHA:
  5. CHU:
  6. in a recent note to clients:

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