China Mobile Ltd., sitting on more cash than Apple Inc., is missing the phone industry’s cheapest stock valuations in two years, fueling investor discontent over its takeover strategy.
Shares of Telefonica SA, Spain’s biggest phone company, are nearing their least expensive levels relative to estimated earnings on record as stocks in the MSCI World Telecommunication Services Index trade at their lowest multiples since July 2009, data compiled by Bloomberg show. China Mobile’s cash is better spent on network upgrades at home, Chairman Wang Jianzhou said.
“We do have a strategy but we do not have targets,” Wang said in an interview in Dalian, China. “We try to find some new opportunities for investment, including overseas investment. We think the purpose of any acquisition is to increase new value to our shareholders.”
Wang’s reluctance to buy highlights the diverging views between the world’s biggest phone carrier, flush with more than $50 billion in cash, and minority shareholders who say the company should pursue assets or give money back. Facing slowing subscriber growth at home, China Mobile has yet to make an overseas acquisition and its last major purchase was buying 20 percent of Shanghai Pudong Development Bank Co. last year.
“The worst thing they could do is sit on cash and watch it go up and up, or buy assets in China like recapitalizing banks,” said David Fergusson, a fund manager at Woodside Holdings Investment Management in Singapore. “What they need to do is take a long look at buying European telcos. Telefonica, wow, that’s cheap.”
Fergusson said he has written to Beijing-based China Mobile’s management about the need for better cash deployment and got no reply.
Wang isn’t the only one hoarding cash. Standard & Poor’s 500 Index companies are sitting on more money than ever after boosting cash, equivalents and short-term marketable securities for 10 straight quarters to about $2.8 trillion, up 15 percent from the end of last year and 66 percent more than in December 2007, near the start of the credit crisis, according to data compiled by Bloomberg.
Telefonica shares have fallen 18 percent this year and earlier this month traded below 8 times estimated earnings and close to the stock’s lowest valuation based on Bloomberg data going back to 2005. Telefonica, which has an equity tie-up with China Unicom (Hong Kong) Ltd., declined to comment on whether it would be open to selling more shares of itself.
Phone Industry Mergers
Cheaper valuations have led the phone industry to be the most active one for mergers and acquisitions this year, with the 476 deals announced in 2011 having a combined value of $146.5 billion, according to Bloomberg data. The largest, AT&T Inc.’s planned $39 billion purchase of T-Mobile USA Inc., has run into a legal challenge from the U.S. Justice Department.
China Mobile’s participation in M&As this year has been limited to a March agreement to buy Topssion, a domestic company primarily engaged in sales of handsets and devices, for less than $40 million. A year earlier, it agreed to pay 39.8 billion yuan, then worth about $5.85 billion, for shares in Shanghai Pudong, helping the lender replenish capital after domestic banks extended a record 9.59 trillion yuan of credit in 2009.
That’s left China Mobile with $51.1 billion in cash, equivalents and short-term bank deposits as of June 30. By comparison, Apple had $28.4 billion in cash, equivalents and short-term marketable securities. Apple also held $47.8 billion in long-term securities such as corporate bonds and Treasuries.
While China Mobile shares, up 0.6 percent this year, have halved since their record in 2007, its cash has almost quadrupled during the period. China Mobile gained 2.7 percent to HK$77.65 in Hong Kong trading today.
Rate of Return
“Most shareholders would want you to invest in something that has a high rate of return, or give the cash back,” said Mark Natkin, managing director of Marbridge Consulting Ltd., a Beijing-based market research firm.
China Mobile’s dividend yield of 4.2 percent is about half the returns from Vodafone Group Plc and just more than a third the yield at Madrid-based Telefonica, according to Bloomberg data. Still, it’s the highest yield among China’s three phone carriers.
Wang isn’t ruling out purchases. He’s repeatedly said the company is interested in targets in emerging markets, especially Asia, and would be “rational” in the price it’s willing to pay. He restated the position in May in Hong Kong and said China Mobile may purchase its state-owned parent’s Pakistan unit, which may break even next year, “at any time.”
China Mobile’s parent paid $284 million in January 2007 to buy Paktel, then Pakistan’s fifth-biggest mobile carrier. That was the parent’s first acquisition outside of China and Hong Kong.
China Mobile will use its cash to invest in upgrading its existing second- and third-generation networks and to conduct trials of the next-generation TD-LTE network, Wang said in the Sept. 15 interview.
“First we will roll out new networks, and we will develop the Internet applications,” Wang said. “It is still a story of growth for China Mobile.”
The world’s largest wireless carrier, which has more subscribers than the populations of the U.S. and Brazil combined, has added more than 5 million new users every month this year, though growth is slowing. Sales gained 7 percent last year, the first time it failed to increase by at least 10 percent since the company went public in 1997.
Spending to Upgrade
China Mobile’s capital expenditure will likely reach a combined 262 billion yuan this year and the next as it upgrades its wireless network to maintain its lead over iPhone-provider China Unicom and China Telecom Corp., said Dundas Deng, an analyst at Guotai Junan International.
“They would like to maintain a very strong cash position to help fund capex,” Deng said. “They don’t want to sacrifice their leading position in the 2G sector, so they will continue spending to upgrade 2G and 3G even as they prepare to roll out 4G.”
Still, the company can easily afford its spending plans, said Paul Wuh, an analyst at Samsung Securities Co. in Hong Kong. China Mobile’s cash will rise from 370 billion yuan this year to 500 billion yuan by 2013, according to Wuh.
“They don’t need it, but they aren’t going to give it back either,” Wuh said. “They haven’t done anything stupid with cash, but they haven’t done anything smart, either. It’s just sitting there.”
That won’t sit well with investors including Woodside’s Fergusson, who says shares of phone companies are a bargain.
“From Telefonica’s perspective, their share price is in the toilet at the moment, the value is extraordinary,” he said. “Could China Mobile use cash to buy a stake in Vodafone without regulatory issues? Yes.”