3 Key Trends Impacting China Mobile’s $58 Value

China Mobile (NYSE:CHL) is the leading mobile telecom service provider in mainland China and the largest mobile service provider in the world. It has a customer base greater than the population of many countries. The company provides both mobile voice services and value added services such as music, voice mail, SMS text messages and mobile Internet as well as applications for music, gaming and TV. It seeks to increase its penetration in the individual customer market by enhancing its mobile Internet services and by promoting the mobile handset as a multi-functional device given the low penetration of smartphones in China. In contrast to major U.S. telecom operators like AT&T (NYSE:T) or Verizon (NYSE:VZ), China Mobile does not offer landline phone service.

We recently launched coverage on our analysis of China Mobile with a $58 price target which represents nearly 20% upside from the current market levels.

Below we highlight three of the key trends shaping the competitive landscape of the telecom industry in China and how it relates to China Mobile.

1) Surging Competition in the Telecom industry in China

In 2008, the Chinese government undertook massive restructuring of the telecom industry in China. It allowed telecom providers to offer both mobile and landline services.

After merging and demerging, 3 companies emerged as a result of this process: China Mobile, China Unicom and China Telecom. The government wanted to create companies of comparable scale and standing, and it also set a maximum limit for the level of tariffs that could be imposed on the people, making the industry highly regulated. Mobile number portability was also allowed as a part of this restructuring process.

In its quest to make competition more viable in the Chinese telecom industry, the government has taken measures which has increased the customer base, revenues and profitability of the rivals of China Mobile. This has resulted in decreasing market share for China Mobile in the mobile market and is expected to continue its negative impact in the future.

2) High Growth Potential

In spite of the fact that China Mobile is the largest telecom service provider in the world, it still has high growth potential owing to the increasing number of people using mobile phones. The number of mobile phone users in China is expected to cross the 1 billion mark by early 2012. This is primarily because the rural market still remains largely untapped and has been recognized by the company as a big potential for expanding customer base and increasing revenues.

Moreover, the smartphone penetration in China stands at only 15%. The increasing popularity of smartphones due to the ease of use and convenience makes better growth prospects for the industry as a whole. Recognizing this, the company is in talks with Apple to launch the iPhone on its mobile service.

3) Value Added Business gaining momentum

Value Added Business refers to all offerings which supplement the main voice service business of the company. China Mobile offers various such services like caller tunes, voicemail, SMS text messages and mobile Internet as well as applications for music, gaming, TV to name a few. There has been an increasing number of applications which are being developed by the company due to its popularity and data use is a huge growth opportunity for China Mobile and all telecom operators.

Revenues generated from this source as a proportion of the total revenues of the company has been steadily rising, which also tends to carry a higher margin. In line with this, greater marketing initiatives have also been taken. Mobile Internet services are expected to generate the highest growth in the coming years.

See our Full Analysis For China Mobile’s Stock