The world’s largest market for smartphones is China. Smartphone shipments in the country are expected to spike to as many as 460 million by 2017, according to research firm IDC. China’s mobile Internet market in general is expected to explode over the next five years, with Morgan Stanley (NYSE:MS) putting a $30 billion price tag on it by 2015. So, what is the best way for you to take advantage of this growing trend?
Smartphones and China…
Apple Inc. (NASDAQ:AAPL) and Samsung are the two most dominant foreign companies in the Chinese mobile market. Samsung has a larger presence than Apple, with a 19% share of the $80 billion Chinese smartphone market alone– a lead of over 10 percentage points, according to IDC. Samsung also has three times as many retail stores as Apple in China.
Samsung opened its first office in the country way back in 1985, which gives it the first-mover advantage. Apple Inc. (NASDAQ:AAPL) only recently stepped into the country in comparison to its rival. But the latter company is not just sitting on the sidelines, and may have bigger plans for expansion.
Greater China (which includes Taiwan and Hong Kong) accounted for roughly 13% of Apple Inc. (NASDAQ:AAPL)’s overall sales in its most recent quarter– equating to around $5 billion. Tim Cook is looking to reverse the trend of slumping Greater China sales, which dropped by 43% from April through June. Apple badly needs a deal with China Mobile, and investors have awaited one for quite some time now.
The world’s largest carrier…
A deal with Apple Inc. (NASDAQ:AAPL) would also benefit China Mobile Ltd. (ADR) (NYSE:CHL), which would most likely see an immediate pickup in sales if they were able to offer iPads and iPhones to their consumers. China Mobile would also gain many new customers as well.
And then there’s Samsung. The Korean giant, unlike Apple, already has a working relationship with China Mobile Ltd. (ADR) (NYSE:CHL), and recently sold 12.5 million handsets in China in the first quarter of 2013– double the amount of iPhone sales in the same period. Many of these handsets were likely sold through China Mobile. This further illustrates the fact that Apple Inc. (NASDAQ:AAPL) needs to jump on board. It would definitely help them boost sales in their second biggest market.
So who’s the real winner here? It looks like China Mobile Ltd. (ADR) (NYSE:CHL), who is benefitting from the Chinese mobile revolution from smartphone sales from Samsung and other local Chinese handset makers. Getting Apple on board would be a huge added bonus.
Valuations
How does China Mobile Ltd. (ADR) (NYSE:CHL) stack up as an investment?
China Mobile is trading cheaply in relation to earnings, carrying a P/E ratio of only around 11. The company also has more than $64 billion in cash with only around $4.5 billion in debt. A debt-to-equity ratio of only 0.0396, accompanied by a strong current ratio of 1.5, indicates a robust, healthy balance sheet.
Shares also pay out a generous dividend, yielding a tad under 4%. A low payout ratio of 39% also indicates that the payout is sustainable, and the dividend should be pretty safe.
The company is also discounted to peers, with China Telecom Corporation Limited (ADR) (NYSE:CHA) trading at about 16.5 times earnings and China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU) trading at over 27 times earnings. China Mobile’s dividend also trumps its competitors in yield, with China Telecom and China Unicom yielding only 2% and 1.20% respectively.
The bottom line
Accounting for China Mobile Ltd. (ADR) (NYSE:CHL)’s massive size and dominance in the Chinese mobile market, shares look cheap. The company will continue to generate earnings from smartphone makers such as Samsung. A deal with Apple Inc. (NASDAQ:AAPL) could provide a catalyst for even more growth– which would make shares theoretically even cheaper at today’s level if earnings suddenly increased from an influx of new customers and sales. The company also pays out a relatively safe, income-generating dividend.
While investing in Samsung or Apple will add exposure to Chinese smartphone and mobile growth to your portfolio, China Mobile is the pure play, and is best positioned to capitalize from this growth directly.
China Mobile is a compelling value play and a buy at current levels.
Joseph Harry has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Joseph is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article How to Invest in China’s Explosive Mobile Growth originally appeared on Fool.com and is written by Joseph Harry.
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