China Mobile dials up a promotion

Back in spring, when Chinese stocks started to appeal to me, I couldn't ignore China Mobile. As the dominant cellphone carrier in the MIddle Kingdom, I read that the big cities had been saturated already. All that was left were the rural areas. I thought of CHL as a steady, reliable, but slow growth mover.

Boy, was I wrong. Here's a closer look.

China Mobile ADR (CHL) $83

• The skinny
I never really anticipated the growth of cellphone technology. I never realized back in the spring exactly how dependent Chinese are on their cells to get on the internet, far, far more than us in the states. And with the coming expansion of the industry — online gaming through cellphones, for example — there's really no barrier to how far CHL can go when the country has a population of 1.3 billion. BEEEEEELLLLLLION.

• Earnings





• Fundamentals
See the financials at Yahoo Finance
It's easy to think of a giant conglomerate like China Mobile more like a utility, but that wouldn't be right. Though the P/E is 34, the forward P/E is just 25. The profit margin (22%) and operating margin (34%) are insatiable. Quarterly revenue growth (21%) and earnings growth (25%) are tremendous. Total cash is $24.6 billion, with total debt at just $4.8 billion. Short interest is miniscule, but that's not a big deal. What's not to like?

• The chart





















I have to confess, at first glance, this looks like CNOOC's chart. Same explosive move after the fed rate cut, a multitude of up gaps. Crazy, but in China, oil and cellphones rule.

• News
S&P MAINTAINS BUY OPINION ON ADSS OF CHINA MOBILE
We believe CHL continues to generate strong subscriber growth, having reported 11.2 million net additions in July and August, putting the company on pace to outperform our forecast of a 20.5% customer increase for '07. We are raising our '07 earnings per ADS estimate by $0.02 to $2.82 and our '08 projection by $0.12 to $3.27, reflecting higher revenues, as CHL further expands in rural markets. We are also increasing our 12-month target price by $7 to $87, incorporating a 10.7% free cash flow growth rate, up from 10.1%, into our discounted cash flow analysis.

Grade: A-. I read this stock wrong in the spring, giving it just a B grade — same as Microsoft. What I failed to gauge is that MSFT's growth curve is behind it, while CHL's growth is ongoing, perhaps short of the peak by many months or years. This is a true A- stock, not a B grader. I don't consider CHL a buy here at 83, but when it dips below its 10-day SMA, I'll be watching more closely.

Pupule says: Wait.