China Mobile: Buy This Hot Telecom Stock Before It Leaps Higher

September 25, 2012 by: Cris Frangold  |  about: CHL, includes: AAPL, S, T, VZ

 

It is hard competing against titans such as AT&T (T), Verizon (VZ) and Sprint (S). Probably one of the best ways to do it would be to focus your attention on the world's largest population and dominate that market. That is just the strategy China Mobile (CHL) uses.

China Mobile boasts more than 683 million customers, and is currently the world's largest telecom network. Among its accomplishments, the company is proud of the fact that it has provided coverage from Mount Everest during the Beijing 2008 Summer Games.

The company has been built on a solid strategy of niche marketing and strategic partnership. Its longtime standing of providing exceptional service to mainland China consumers has awarded it with a $213 billion market cap - the second largest in Asia. However, in the coming months, it will need to alter its strategy in order to stay competitive.

What Is Happening

China Mobile is built on a third-generation network which is based on a standard used only in China. As consumer demand for greater range and capabilities increase, so does the appeal for rival smartphones, including Apple's (AAPL) iPhone. Subscriber growth is slowing due to the massive sales numbers of the iPhone 5, and rightly so. People who pay for the high end phone expect high end functionality.

U.S. phone service companies are having a hard time cracking the Chinese "nut." With so much in communication being government controlled, the market has been primarily left to Chinese companies that can operate more easily in it.
Moreover, while Americans see telecom providers as something that can be as easily changed as one's wardrobe, in China, consumers can't switch providers easily without changing their phone numbers, which helps China Mobile hold on to its customer base.
What Will Happen
It is unlikely that a service company will gain much traction in China without a massive service/product relationship - such as only selling an iPhone with AT&T service. This is a play out of Verizon's book. Last year, it began offering Apple's iPhone on its networks. That move alone saw new subscribers jump by more than 2 million in two quarters. By 4Q, Verizon had sold 4.2 million iPhones, more than double that of AT&T's sales and a mere gain of 800,000 new customers. Verizon also continues to increase service by providing landlines and broadband services. It's gross margin is currently at 58.63%, compared with AT&T at 54.73% and Sprint at 43.54%.
What is more likely is that China Mobile will dig into its deep pockets (pockets of about $48 billion in net cash) and develop a faster and more reliable fourth-generation network. It is not banking on consumers choosing the company simply because options are limited; it is putting forth effort to better serve its customers through a higher functioning network.
Summary
While I see Verizon as a strong performer that will certainly benefit as more innovative phones spread its service, one cannot underestimate the benefits of investment in companies supplying a booming population like China. As mobile popularity increases, so will companies that supply devices and service. China Mobile is currently trading around $55.32, near the top of its 52-week range of $46.26 and $59.45. I think this stock will be heading significantly higher in the coming weeks and months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)