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After PDD disrupted the platform e-commerce, ByteDance has also entered the group-buying market. The continuous consolidation in the internet industry cannot be separated from the support of operators such as CHINA MOBILE. With the rise of live streaming and short videos, users' demand for data usage has increased rapidly. Therefore, CHINA MOBILE and other telecom operators have become indispensable players.
CHINA MOBILE is far ahead of the other two operators in terms of user base and capital expenditure, making it the undisputed leader among domestic operators. In the previous article, Dolphin Research mainly focused on CHINA MOBILE's core business. In this article, we will focus on the company's performance estimation and valuation.
Starting with the business of CHINA MOBILE, we will analyze and forecast the company's core business revenue, gross profit margin, and expenses, and then estimate the company's future performance. Dolphin Research believes that CHINA MOBILE's business will continue to grow steadily, with both revenue and net profit maintaining a single-digit compound growth rate.
Through model analysis and forecasting, CHINA MOBILE's revenue is expected to grow to over 1.2 trillion RMB by 2027, with a compound growth rate of about 5%. At the same time, the company's net profit is also expected to reach over 170 billion RMB by 2027, with a compound growth rate of about 7%.
After estimating the company's performance, we will consider the valuation aspect. Due to the company's strong cash flow, Dolphin Research mainly focuses on two dimensions: PE and DCF.
PE perspective: Taking CHINA MOBILE's current A-share price of 99.19 RMB as a reference, the corresponding market value is 21.2 trillion RMB. Combining Dolphin Research's expectations for the company's performance, the PE ratio is approximately 14.69 times.
DCF perspective: After the peak of 5G construction, CHINA MOBILE's cash flow is expected to improve steadily. Under the assumption of WACC=10.5% and g=3%, Dolphin Research adjusts the valuation of CHINA MOBILE to 22.9 trillion RMB (107 RMB/share). Compared to the current A-share price of 99.19 RMB, the difference is only 7.8%, indicating a relatively fair pricing.
Considering both the PE and DCF perspectives, CHINA MOBILE's current stock price does not appear to be significantly undervalued. However, this does not mean that the company lacks investment value. Due to the company's ability to generate stable cash flow, it can provide decent dividends while maintaining steady business growth.
Even in the relatively high-priced A-share market, the company still offers a dividend yield of around 4%. In other words, even if the stock price of CHINA MOBILE does not rise, investors can still earn a return of around 4%, outperforming last year's Shanghai Composite Index (-3.7%). China Mobile's stock in Hong Kong is only HKD 64 per share, which seems cheap, but there has always been a liquidity discount between the two markets. The liquidity discount in the Hong Kong stock market has always existed. Although it is difficult to eliminate the discount in the Hong Kong stock market, investors can enjoy a higher dividend yield due to the lower stock price. If you are pursuing dividend yield, China Mobile in the Hong Kong stock market is also a good choice.
Overall, the current investment in China Mobile is more considered from the perspective of dividend yield. As for the stock price level, it has been relatively fully priced.
Here is Dolphin Research's detailed analysis of China Mobile:
In considering the investment value of China Mobile, Dolphin Research focuses on performance estimation and valuation. In this article, Dolphin Research first conducts performance estimation for the company.
I. Performance Estimation of China Mobile
Dolphin Research's performance estimation of China Mobile mainly starts from three aspects: revenue, gross profit margin, and expense ratio, and then estimates the company's future performance.
1.1 Revenue
From Dolphin Research's previous introduction to China Mobile's business, the company's core business is telecommunications operation services. The main components include wireless internet services, wired broadband services, voice services, and short messaging services, accounting for nearly 70% of the total.
Therefore, when estimating revenue, we consider the business segments:
1）Wireless internet services: With the rise of online videos and short videos, users' wireless internet usage has significantly increased. However, China Mobile's wireless internet business has not experienced double-digit growth, mainly due to the impact of usage and unit usage fees on business revenue.
In forecasting the business, Dolphin Research believes that wireless internet usage will continue to increase, but the growth rate will gradually slow down. The unit usage fees for company users will also continue to decrease, but the rate of decrease will narrow. China Mobile's wireless internet business scale will remain above CNY 400 billion, maintaining a stable single-digit growth trend.
2）Wired broadband services: Although the business volume is smaller than wireless internet services, the growth rate is relatively fast. In terms of quantity and price, China Mobile's wired broadband users also have double-digit growth, but the decrease in broadband fees is relatively small. When predicting the business, Dolphin Research believes that the user base of wired broadband will continue to grow, but the growth rate will slow down. The tariff for broadband will maintain a slight decrease. CHINA MOBILE's wired broadband business scale will continue to grow, with an overall growth rate higher than wireless internet access, and the business is expected to grow to over 130 billion yuan.
3) Telephone voice service: With the popularity of voice and video calls, it directly affects the use of telephones. As wireless internet usage increases, the use of telephone calls decreases.
Dolphin Research believes that the company's telephone voice service volume will continue to decline, but because the scenario of telephone calls cannot be completely replaced, the revenue from telephone services will slowly decline. The revenue in the next few years is expected to remain at around 70 billion yuan.
4) Short message and multimedia messaging service (MMS): Similar to telephone calls, MMS is a traditional business of telecommunications operators and has been influenced by the development of the Internet. After the penetration of instant messaging software such as QQ and WeChat, the current MMS business is mainly focused on banks, enterprises, and other customers, and is in a relatively stable state. Live streaming and short videos have little impact on the current MMS business.
Dolphin Research believes that the MMS business of CHINA MOBILE is mainly focused on B-end users, and the user demand is relatively stable. CHINA MOBILE's MMS business will remain stable.
5) Total revenue of CHINA MOBILE: In addition to core business, CHINA MOBILE also has application and information services and other businesses, both of which account for a relatively small proportion. Among them, application and information services have certain growth potential, while other businesses are relatively stable. Dolphin Research assumes that the growth rates of these two businesses are in double digits and single digits, respectively.
Therefore, Dolphin Research predicts that the revenue scale of CHINA MOBILE in 2027 will exceed 1.2 trillion yuan, with a compound growth rate of around 5%, based on the estimation of the company's core revenue and other business revenue.
1.2 Gross Margin and Expense Ratio
1) Gross Profit Margin: Looking closely at CHINA MOBILE's cost items, they can be mainly divided into network operation and support costs, and hardware product costs. In terms of network operation costs, they mainly consist of the core business costs of the company, while hardware product costs are mainly related to other businesses.
From this perspective, the company's gross profit is mainly generated from its core business, while the gross profit margin on the hardware side is very low. In terms of gross profit margin, Dolphin Research assumes that the gross profit margin of the company's telecommunications operation services will continue to be maintained at around 60%, which is relatively high.
2) Expense Ratio: CHINA MOBILE's operating expenses mainly consist of depreciation and amortization, sales expenses, and management and operation expenses. Due to the heavy asset investment nature of telecom operators, the company's depreciation and amortization expenses account for 20%. The remaining sales expenses and others have relatively low proportions.
Dolphin Research believes that CHINA MOBILE's sales, management, and other general operating expenses have a relatively stable proportion. With the peak of 5G construction passing, the proportion of depreciation and amortization expenses is expected to decline, thereby reducing the company's overall operating expenses.
As the business continues to develop, CHINA MOBILE's operating expenses will still increase, but their proportion in revenue will decrease.
1.3 Profit Situation
Combining the assumptions about revenue, gross profit margin, and expenses, Dolphin Research predicts that CHINA MOBILE's net profit is expected to increase to over 170 billion by 2027, with a compound annual growth rate of about 7%.
II. Valuation Considerations for CHINA MOBILE
Due to CHINA MOBILE's current listing in multiple markets, there is an issue of liquidity pricing between different markets. The current market mainly uses the A-share price as a reference, while the Hong Kong stock market as a whole has a liquidity discount.
2.1 PE Perspective
Taking the current A-share price of 99.19 yuan as a reference, with a total of 21.4 billion shares, the corresponding market value is 2.12 trillion. Combining Dolphin Research's previous performance estimates, the company's PE ratio for 2024 is approximately 14.69 times.
Referring to the historical PE ratio of CHINA MOBILE since its listing on the A-share market, the company's current valuation is not in an undervalued state.
2) DCF Perspective
Due to CHINA MOBILE's strong cash flow, the DCF method is relatively suitable for valuing the company.
Valuation calculation using DCF mainly involves discounting the company's future free cash flow. In the previous section, Dolphin Research has already made expectations for the company's future performance.
Company's Free Cash Flow = After-tax Operating Profit + Depreciation - Increase in Working Capital - Capital Expenditure
Using the DCF model for calculation: Assuming a WACC of 10.5% and a growth rate of 3%, Dolphin Research adjusts the valuation of CHINA MOBILE to CNY 2.29 trillion (CNY 107 per share), corresponding to a PE ratio of 17.5 times and 15.84 times for the net profit in 2023 and 2024, respectively. Considering the current stock price of CNY 99.19, it is relatively fairly priced.
3) Valuation Perspective on CHINA MOBILE:
Considering both the PE and DCF perspectives, the current stock price of CHINA MOBILE does not show obvious undervaluation, but this does not mean that the company lacks investment value. Due to the stable cash flow generated by CHINA MOBILE's business, the company can provide decent dividends while maintaining steady business growth.
Even in the relatively high-priced A-share market, the company still offers a dividend yield of around 4%. In other words, even if the stock price of CHINA MOBILE does not rise, holding it last year would still yield a return of around 4%, outperforming the Shanghai Composite Index (-3.7%) last year.
CHINA MOBILE is priced at only HKD 64 per share in the Hong Kong stock market, which seems cheap, but there is always a liquidity discount between the two markets. The liquidity discount in the Hong Kong stock market has always existed. Although it is difficult to eliminate the discount in the Hong Kong stock market, investors can enjoy a higher dividend yield due to the lower stock price. If pursuing a dividend yield, CHINA MOBILE in the Hong Kong stock market is also a good choice.
Dolphin Research's retrospective on CHINA MOBILE and related articles:
December 19, 2023, in-depth analysis of CHINA MOBILE: "A Solid China Mobile in the Flowing Internet Era"
November 22, 2023, NVIDIA conference call: "The First Wave of Artificial Intelligence (NVIDIA 3QFY24 Conference Call)" Analysis of NVIDIA's Financial Report on November 22, 2023: "NVIDIA: Is the Computing Power Emperor at Full Blast? The "False Fire" is Flickering" Link
Analysis of AMD's Financial Report on November 1, 2023: "Without NVIDIA's Explosive Power, AMD's Recovery is Too Slow" Link
AMD's Conference Call on November 1, 2023: "AI PC, a New Wave of Productivity (AMD 3Q3 Conference Call)" Link
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