There has been a lot of confusion around China Mobile’s (CHL) future prospects in the wireless market. China Mobile is currently building out a 3G network standard known as TD-SCDMA, created in China and rife with protectionist tones and technical snafus. The Chinese Ministry of Industry and Information Technology has mandated that China Mobile build out the standard, but by sourcing all the development work domestically, the standard has lost any global relevance and inter-operability.

Still, the rollout continues unabated as 38 cities are to be up and running by mid-2009. Meanwhile, China Mobile’s two main competitors are likely to get 3G licenses from the government in the globally compatible CDMA2000 and W-CDMA standards. The confusing setup is all part of a broader, concerted effort by the Chinese government to create three globally competitive operators, where before China Mobile was the lone 800lb gorilla. (This earlier post discusses the forced M&A that went on earlier in the year)

Tea Leaves Give Mixed Reading

So the bad news is that billions are being spent on a system that closes off many handset options, including the iPhone. However, compared to its competitors, China Mobile’s billions in capex needed to get rollout moving have been quite modest. The company has only spent $2.2 billion (U.S.) to get the first 10 cities implemented, whereas China Unicom (CHU) and China Telecom (CHA) will need to pony up a combined $36 billion to get their networks set up, as basically, they are starting from scratch.

China Mobile, meanwhile, has received increasing handset offerings for its 3G standard, getting Nokia on board recently to join LG Electronics (LGERF.PK) and Samsung (SSDIF.PK). CHL has also re-opened talks with Apple (AAPL) to work out a deal, one that would likely include Apple designing a dual-band handset capable of running on GSM and TD-SCDMA while shutting off its W-CDMA chipset. We could see something inked early in 2009, but (as with all business plans right now) that is subject to change.

The good news is that we’re fairly close to the time when serious 4G rollout plans will begin. The global recession may throw a massive wrench into the current timetables, but 4G figureheads Verizon (VZ), Vodaphone (VOD) and China Mobile have discussed getting a rollout going as early as the first half of 2010. While Verizon and other Western telecoms will likely adopt a slightly different multiplexing standard than China Mobile, the global equipment makers will dually support the standards.

For its part, management at CHL has pretty much acknowledged the current problems with its 3G license, but note that about 60% of the investment in TD-SCDMA terminals can be put towards integration into 4G LGE. For the next year, China Mobile will continue to expand the 3G rollout, mainly to get the infrastructure footprint built for 4G, which should include all the necessary backwards compatibility for 3G and GSM (EDGE 2.5G), the latter being the “fallback” network currently used by nearly all CHL customers.

Stock Price Stabilizing

CHL shares are forming what appears to be a stable bottom just above the $40 level. Down over 50% from their peak, China Mobile shares reflect the certainty of slowing growth and the ongoing concerns of government intervention. The margins are absolutely to die for, with a 27.9% net margin in the last quarter to go with operating margins above 35%. Go compare this with Verizon or AT&T (T) to find out just how rare this is in the industry.

China Mobile’s dividend (which is quasi-pegged to the USD) should see continued growth as management has expressed its desire to keep the payout ratio constant. For investors willing and able to take a 3-5 year view of this company, the secular trends in play should stand out like a neon light. Rural exposure is still below 50% in most provinces, and China Mobile is years ahead of the competition in terms of customers and footprint.

The company is adding over seven million new customers per month, and also continues to drive operating leverage from higher use of SMS and other data services. China Mobile currently trades for about 11x run-rate earnings and boasts a minute .08 debt/equity ratio, providing valuable measures of safety to market and sector averages.

Source:seekingalpha