Safe Haven Preferred: In-Depth Analysis of China Mobile's 2024 Mid-Year Report!
China Mobile, since its return to the A-share market in January 2022, has seen its stock price reach new highs repeatedly, with consecutive annual increases for three years, rising by 25% in 2022, 53% in 2023, and peaking at a 17% increase in 2024.
Against the backdrop of the overall sluggish A-share market, such market performance is quite rare.
Looking back, China Mobile has gradually taken the leading position in the A-share market capitalization for several reasons: 1.
The excellent business model provides strong operating cash flow and an almost monopolistic market position, offering unparalleled certainty and attracting hedging funds.
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2.
Solid financial performance, ultra-low debt ratio, long-term profit accumulation, and continuous dividend growth provide investors with a strong sense of security.
This can serve as a base allocation in institutional investment portfolios and also become the main choice for aggressive funds, both offensive and defensive, adaptable and versatile.
3.
With multiple concepts such as Digital China, AI computing power, and China-specific valuations, combined with the high cost-effectiveness of being the first in market value and low turnover rate, it has become the preferred target for national team funds to adjust against the trend.
4.
With favorable winds, it helps us rise to the blue sky.
The market preference has shifted significantly towards state-owned enterprises, high-dividend stocks, and leaders of the CSI 300 index, allowing China Mobile to climb higher.
On August 9, China Mobile released the "2024 Semi-Annual Report".
Let's look at the quality of this freshly baked financial report from various aspects.
Chapter 1: Financial Fundamental Analysis (1) Cash Flow and Debt Situation China Mobile's debt ratio has been steadily declining.
The debt ratio in the first half of the year was only 32.11%, slightly lower than the 32.76% in the first quarter.
Moreover, China Mobile has almost no interest-bearing debt, with core debt items being accounts payable, advance receipts, and lease liabilities.
This reflects solid and stable operations.
Not only that, but the cash flow performance over the years has been very good, with sales collections accounting for 96% of revenue in the first half of the year, and net operating cash flow accounting for 163% of net profit.
The more stringent free cash flow is also good.
The healthy cycle of funds means that its accounts receivable ratio is only 8.5%, which is very healthy.
China Mobile's excellent performance in terms of debt and assets is mainly due to the "collect payment first, then provide service" business model, and is also related to the slowdown in capital expenditure in recent years, entering the post-operation stage.
(2) Non-current Asset Structure and Fixed Asset Expenditure China Mobile's asset structure is large and extensive.
In the first half of the year, the scale of fixed assets has reached over 680 billion, and cash expenditure on the purchase and construction of fixed assets has reached over 70 billion.
The construction in progress is 94.9 billion, which has increased significantly compared to the end of the first quarter and the beginning of the year.
However, there is no need to worry, as this is not a signal of restarting infrastructure expansion in response to economic downturn.
Because the construction in progress in the middle of the year is usually the highest, and this year it has actually decreased compared to the previous year.
Other asset conditions are good, with no major issues in high-risk items such as intangible assets and goodwill, so there is no need to worry.
(3) Dividend, Financing, and Profit Accumulation Throughout its history, China Mobile has rarely financed and pays dividends twice a year.
Each dividend has been steadily increasing, with a growth rate similar to the profit growth rate.
However, due to the rapid increase in stock prices, the dividend yield has decreased compared to the time of listing.
Currently, China Mobile's dividend yield is 4.2%, higher than that of China Telecom and China Unicom.
The current dividend payout ratio is around 71%, compared to the 84% dividend payout ratio of Kweichow Moutai, there is still room for improvement.
I believe that the dividends of China Mobile will continue to increase steadily in the future, and even accelerate.
There are currently 1.18 trillion in undistributed profits on the books, accounting for 52% of the market value, with plenty of money to be distributed.
In fact, from another perspective, if this money were distributed, then buying China Mobile would be equivalent to getting a 50% discount, right?
So, from an asset perspective for a rough valuation, it can be found that the intrinsic value of China Mobile is severely underestimated!
(4) Performance Growth and Profit Quality In recent years, the customer penetration rate of communication operators has been saturated, with no major growth points in the short term, and for the current performance volume, there is basically no growth.
In the first half of 2024, China Mobile's revenue increased by 3% year-on-year, and profits increased by 5.3%, slightly slower than the first quarter.
However, it is slightly worse than China Telecom (Q1 revenue increased by 3.7%, profits increased by 7.7%) and China Unicom (H2 revenue increased by 2.9%, profits increased by 11%).
The size gap between the three operators is very large, and this difference in growth rate is not enough to explain anything, so there is no need to overinterpret.
However, the profitability of China Mobile is obviously better than that of China Telecom and China Unicom.
In the first half of the year, China Mobile's gross margin was 30.81% (nearly 2 percentage points higher year-on-year), slightly higher than its competitors; the net profit margin was 14.68% (0.3 percentage points higher year-on-year), more than twice that of its competitors.
(5) Cost Control In the first half of the year, China Mobile's control over the three major expenses was acceptable, with little change, but R&D expenses have increased significantly.
Among them, the sales expense ratio was 5.3%, slightly higher year-on-year, with little difference.
The management expense ratio was 5%, slightly lower year-on-year, with little difference.
Financial expenses had a net positive reduction of nearly 1 billion, down by nearly half, but under this revenue volume, it is also insignificant.
Among them, R&D expenses increased by 40% year-on-year, with an investment scale of 12 billion in H2, and the expense ratio increased to 2.2%.
China Mobile has seen a significant increase in R&D investment for several consecutive years, which is a change in the company's operations worth mentioning.
Chapter 2: Business and Operational Management Analysis After more than twenty years of development, China Mobile has become the world's leading enterprise in terms of network scale, customer scale, and revenue scale.
(1) From the perspective of business types: In the first half of 2024, the company's revenue was 546.7 billion yuan.
Among them, the main business revenue was 463.6 billion yuan (accounting for 85%), a year-on-year increase of 2.5%.
Other business revenues were 83.2 billion yuan (referring to businesses such as selling mobile phones, with a gross margin of only 1.9%), a year-on-year increase of 6.0%.
In the main business: wireless internet services accounted for 37.5%, a year-on-year decrease of 3.2% (also slightly decreased in 2023); application and information services revenue accounted for 23.6%, an increase of 10.9%, which is the core growth point of H2; wired broadband business accounted for 11.5%, an increase of 8.4%; voice business accounted for 6.6%, a decrease of 4.3%; short message and color message business accounted for 3%, an increase of 0.5%.
From the growth of each business, it can be seen that the driving force behind China Mobile's profit growth is likely to be driven by the efficiency improvement of cost control, and the main revenue growth is still weak.
Outlook for growth points in the next few years: the rapid popularization of new energy vehicles is expected to drive the recovery of wireless network growth; digital services and Ai computing power services for the B-end market, etc.
; further, one can imagine the opportunities for humanoid robots, etc.
But these are not things that can be achieved overnight, and with China Mobile's revenue volume, the annual growth rate of future performance will still be maintained at below 10% for a long time.
(2) From the perspective of customer types: Among them, the personal market revenue was 255.2 billion yuan (accounting for 46.7%), a year-on-year decrease of 1.6%, and a slight increase of 0.3% in 2023.
China Mobile's customers have exceeded 1 billion, among which the penetration rate of 5G network customers has reached 51.4% (I feel there is a mistake in the financial report data, because the financial report for 2023 was already 795 million).
The ARPU value is 51 yuan, an increase from 49.3 yuan in the 2023 financial report.
Among them, the family market revenue was 255.2 billion yuan (accounting for 13%), a year-on-year increase of 7.5%.
The number of family broadband customers reached 272 million households, with a net increase of 8.48 million households, leading the industry in scale.
The comprehensive ARPU of family customers reached 43.4 yuan, a year-on-year increase of 0.2%.
Among them, the government and enterprise market revenue was 112 billion yuan (accounting for 20%), an increase of 7.3%.
Among them, mobile cloud contributed 50.4 billion yuan, a year-on-year increase of 19.3%.
Among them, the emerging market revenue was 26.6 billion yuan (accounting for 4.9%), a year-on-year increase of 13.2%.
Among them, the international business revenue reached 11.8 billion yuan, a year-on-year increase of 16.3%.
Chapter 3: Shareholder and Management Analysis It is worth mentioning that after the social security fund exited the top ten circulating shareholders in the first two quarters of the financial report, it reappeared in the second quarter of this year, and the increase in holdings is considerable.
Currently, the social security fund's shareholding in China Mobile is lower than in previous years, and it is not ruled out that the future will be a cycle of gradually increasing holdings.
The company has not carried out state-owned enterprise equity strategic reforms like Unicom, and there is not much to analyze.
As for the company's management, they are all appointed by state-owned enterprises, and there is not much more to say.
Chapter 4: Industry Valuation and Competitive Pattern Analysis (1) Industry Competitive Pattern and Characteristics Communication operators, no matter in which country, are almost monopolistic oligopolistic competitive patterns, with very few new entrants and extremely high barriers to entry.
The situation in our country is slightly different, with new entrants such as Guangdian Network emerging due to system reforms, but they cannot make much of a splash.
Perhaps the potential threat worth worrying about is the emergence of new business forms similar to Musk's "Starlink", but even so, due to the national conditions, the reality is that the threat to traditional operators like China Mobile is not very big.
(2) Industry Valuation Analysis Looking at more than 60 listed communication operators worldwide, the performance is not much different because the business model and competitive pattern are too similar.
However, there are some differences in valuation: 1.
The P/E ratio of the vast majority of telecom operators is within 20 times, and those exceeding 20 times are often due to unusual performance.
The median P/E ratio is about 16 times, similar to China Mobile.
In some representative regions, the P/E ratio of Japanese telecom operators is about 16 times, South Korea is 7-10 times, the United States is 15-25 times, Taiwan is about 25 times, Hong Kong's local telecommunications are 15 times (the valuation of China Mobile in Hong Kong stocks is only two-thirds of the mainland), and European countries vary from 12-25 times.2.
From a profitability perspective, China Mobile may not have much room for undervaluation, but the valuation from an asset perspective is quite different.
The median Price-to-Book (PB) ratio of global telecom operators is over 2 times, while China Mobile's is only 1.67.
Moreover, looking at the asset structure, Mobile has accumulated substantial undistributed profits over the years (which constitute a very high proportion of market value), a highlight that operators in other countries do not possess.
Example 1: Take AT&T in the United States as an example, with a market value of 100 billion, a price-to-earnings ratio of 10.9 times, and a price-to-book ratio of 1.3 times, but its balance sheet shows only a little over 10 million in undistributed profits, with profits from previous years all distributed.
How can this compare to the trillions in profit accumulation on Mobile's books?
Example 2: Take Deutsche Telekom, the largest operator in Europe, as an example, with a market value of 977.4 billion, a price-to-earnings ratio of 25 times, and a price-to-book ratio of 1.3 times, but its balance sheet shows a negative retained earnings.
Chapter 5: Valuation and Investment Strategy of China Mobile.
As China Mobile's stock price steadily climbs, and the valuation gap between A-shares and Hong Kong stocks (-35%) widens, many people may feel insecure at the heights.
This is normal; facing a new unknown space, everyone has more or less a sense of fear.
Therefore, we need to find more certainty factors to strengthen confidence.
In addition to the valuation from an asset perspective mentioned earlier (the conclusion is clearly undervalued), I think it is also appropriate to value from the perspective of discounted dividend returns (as a safety net).
We don't need to use such complex discount models for calculation; below is a simplified logical thinking: Currently, Mobile's dividend yield is 4.2%, and the payout ratio is 71%.
Assuming that the payout ratio will increase to 85% in the next five years, and the profit growth rate CAGR is 5%.
Based on this calculation, if the stock price remains unchanged in five years, the dividend yield can be increased to 6.4%.
For high certainty stocks like China Mobile, the risk premium will not be high.
Referring to the dividend situation of stocks like Yangtze Power and Kweichow Moutai, a dividend yield of 3.5-4% is already worth investing.
In other words, the expected increase in China Mobile's stock price over the next five years is 83% = (6.4% / 3.5%), and the expected annualized return over five years is 12.8%.
The above test of a 12.8% return estimate is quite in line with the historical return range of such stocks, and I think it has strong reference value.
Based on this, the buy and sell strategy for China Mobile that I have formulated is: if the annual holding return exceeds 15%, you can exit and wait and see.
If the time-weighted return is lower than the five-year cumulative return curve, it is appropriate to build a position and buy!