China Mobile (CHL): Olympic potential

"Whenever anyone asks, 'Why invest in China?' the answer is very simple: that’s where the money and exponential future growth is," says Jim Trippon.

The editor of The China Stock Digest then asks, "Will China suffers an Oympic hangover?" Here, he explains why that should not happen and why China Mobile (NYSE: CHL) should do well once the games conclude.

"The Bank of China (BOC) conducted a study of the effects of 12 Olympiads on their host countries over the course of 60 years. They found that nine of the twelve Olympic host countries suffered a decline in GDP growth in the eight years after the games.

"The key to a post Olympic slump is the size of the economy. Smaller economies like Korea suffered larger downturns after the games, while larger economies like the United States were not affected at all.

"In smaller economies the enormous investment dedicated to staging Olympic games created an artificial bubble which was followed by a slump when Olympic building booms came to an end.

"China has made one of the largest investments ever in the Olympic Games with some estimates of spending topping $40 billion. But we don't believe the capital city will go into a slump after the games.

"In fact, Beijing has been forced to defer other infrastructure projects during the run-up to the games. Those and other pressing projects are expected to take up the economic slack in the city after the Olympics.

"Further, thousands of factories have been shut down temporarily in the region surrounding Beijing in an effort to reduce air pollution during the games. Also, somey 50% of Beijing’s automobiles are being taken ofthe roads, and many heavy diesel trucks are being banned from the city.

"Nationwide, the effects of this economic event are likely to be absorbed by the immense momentum of China’s economy.

"In our view, the Olympics will barely register as a tremor in the bigger picture of the Chinese economy. In fact a minor slowdown would be welcome among some economic analysts who remain worried about the effects of inflation.

"Among individual stocks, China Mobile has been in a holding pattern pending the Beijing Olympic Games. Government regulators have ordered all telecom companies to refrain from signing up new subscribers until the games are over.

"It’s a highly unusual request, but Beijing says it’s a necessary move to prevent service disruptions due to increased loads on networks in China’s fast-growing wireless communications sector.

"When new subscriptions resume, we expect China Mobile to retain its position as the largest and fastest growing cell phone company in China.

"With more than 407 million subscribers, China Mobile retains an excellent reputation and has added as many as 6 million new subscribers every month. That’s an 87% share of the new subscriber market and a 69% share of the total market.

"China Mobile appears set to gain exclusive access to the much-coveted Apple iPhone in China in current negotiations. Previous talks had broken down because Apple had demanded a revenue sharing agreement.

"That demand has apparently been dropped. The company has also announced plans to invest another billion dollars in expanding its network and will soon roll out 3G high-speed data service in coming months.

"This top dog in China’s mobile phone scene has a PE multiple of 22 with a solid dividend yield of 2.29%. Considering its ongoing growth, we see the company as attractively valued with a target sell price of $100."