Insights

We have previously highlighted our inability to invest in China-based businesses, driven by our investment processes and the filters we apply. As we stated, we continue to deploy our research efforts to China-based companies to uncover suitable investment opportunities for our investment strategies. Recently, we reversed our stance on one such company, China Mobile, allocating capital to it at the Global Select Value Fund. Note that the change in our stance is very selective and is specific at this point to China Mobile only.

China Mobile is a tale of two widely diverging businesses comprising the stagnant legacy business that accounts for the majority of revenues. It is the business that the market identifies the company with. The second business is a mix of new-age businesses, including wire-line broadband and cloud offerings, which are growing strongly. As the higher growth businesses are starting to become significant as a percentage of the total (38% of the non-device revenues in 2022), the company’s growth profile is beginning to shift upwards.

The chart below shows the company’s mobile and non-mobile revenues over the past eleven years. As is seen, mobile revenues have gone from nearly all of the business (95%) to becoming a much more even mix. In 2022, mobile businesses accounted for 62% of non-device revenues, while non-mobile businesses reached 38% of the overall mix.

Source : Company data, MAEG’s calculations

Mobile Telephony business. The table below shows the annual growth rates of the company’s various business lines since 2014. Within the mobile telephony business, Voice revenues degrew very strongly, declining from RMB 368B in 2012 to 75B in 2022. Voice revenues have been stabilizing around their current level. SMS & MMS revenues have been relatively stable, around the RMB 30B mark for the past ten years.

Non-Mobile Telecom business. The non-mobile telecom business is comprised of wireline broadband and cloud businesses. Both these businesses have continued to grow strongly. While the wireline business’s growth has slowed down towards low double-digit rates, cloud revenue growth has accelerated towards 30% plus.

Source : Company data, MAEG’s calculations

Corporate governance – dividends. Dividends grew strongly between 2003 and 2008 and then came to a halt between 2008 and 2020 with a CAGR of 1.6%. Strong pick up in the last two years, with DPS increasing from 2.93 in 2020 to 3.79 in 2022. The company increased its payout ratio in 2021 from about 55% to about 65%. Further, the DPS has been growing at a healthy rate since and is expected to keep pace with earnings growth, which has accelerated to high single-digit rates.

Source : Company data, MAEG’s calculations

Leverage. China Mobile has a large net cash balance amounting to RMB 460B, i.e., about RMB 22 per share. This equates to about a third of the company’s current market cap.

As we made our allocations, China Mobile traded at a large discount to our assessment of the intrinsic value of the business, a discount that is driven by rear-view mirror thinking. Considering the improved business performance, an increased willingness to share the free cash flow with shareholders, and a clean balance sheet, we are happy to invest in the company.