Buy CHL Stock for the Best Wireless Play Worldwide

China Mobile (CHL) has an opportunity as the world’s largest wireless carrier to experience a revenue and profit growth explosion.

Buy CHL Stock for the Best Wireless Play WorldwideCurrently, China Mobile is undergoing a massive transition to 4G and more advanced wireless products. While this transition has slowed growth short-term, the long-term effects should do wonders for CHL stock. 

China Mobile’s telecommunication services account for nearly 90% of its total revenue, and within that large segment is 2G, 3G and 4G services.

With 820 million customers, you’d think that China Mobile would have more than $53.5 billion in revenue for the first six months of the year. After all, Verizon Communications (VZ) created more than $64 billion during the same span with about an eighth the amount of customers.

But 4G is still new for China Mobile, with the majority of its customers still on 2G and 3G plans. These legacy network customers don’t consume a great deal of data, and therefore pay lower monthly prices.

China Mobile, however, is quickly transitioning 2G and 3G customers to 4G, now having about 230 million 4G customers as of the end of August. That represents a 20.5 million increase in 4G customers over the previous month, and a big increase from the 153 million 4G subscribers it had back in April (up from 90 million last December and 1.3 million in February 2014).

At China Mobile’s current rate, it won’t be long before the majority of customers are 4G subscribers; and when that happens, it will be great for CHL stock.

CHL stock: Accelerated Growth and Higher Margins

Currently, 4G customers account for 62% of China Mobile’s total data traffic. This suggests that long-term, China Mobile’s data traffic will continue to rise much faster than traffic from 2G and 3G falls. Such is the case right now, with mobile data traffic rising 154% in the first half of 2015and revenue from wireless data surging 40% in the same period.

The problem for China Mobile right now is that wireless data traffic accounts for less than 30% of its total revenue. While data growth is impressive, and growing as a percentage of total revenue, declines in other businesses weigh on China Mobile’s overall business. This resulted in overall operating revenue growth of 4.9% year-over-year during the first half of 2015.

However, as China Mobile’s 4G customers increase, and does so quickly, revenue growth should accelerate as well. Meanwhile, as China Mobile completes the construction of its 4G network, capital expenditures will slow, which means higher margins.

Earlier this year, RCR Wireless reported that China Mobile would cut its capex by nearly 6.5% this year, but would still spend more than $30 billion this year. Over the last few years, China Mobile has spent aggressively to cover its 800 million-plus customers with 4G service. The result of this spending was a net profit attributable to shareholders that declined 10% last year to $11.6 billion. During the first half of 2015, profit also declined, but less than 1%, thereby suggesting capex spending is in fact declining.

Bottom Line on China Mobile

The bottom line is that capital expenditures should decline, margins should increase and revenue will accelerate significantly as 4G customers grow. Right now, CHL has about 940,000 4G base stations, 120,000 more than it had at the end of 2014. This suggests widespread 4G service, especially in the important metropolitan areas.

With CHL stock trading at just 14 times earnings and paying a 3.1% dividend yield, it very likely is the best telecom investment in the world. No other company has the same degree of growth and profitability, all rolled into a cheap stock with a high yield.

Nowadays, wireless service providers in developed countries are mostly matured businesses, having 4G networks in place and very little, if any, customer growth. Yet, CHL is the largest carrier in the world and is still netting more than one million new customers each month.

That’s unheard of, and is the icing on the cake for a stock that is the best long-term investment worldwide in telecom.

As of this writing, Brian Nichols was long CHL.

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