China Mobile lures bulls amid profit turnaround bets
Bets that China Mobile's US$2 billion cut in handset subsidies will help the world's biggest phone company reverse a profit slump pushed bullish options on the stock to a 19-month high.
One-month calls that pay out if China Mobile shares climb 10 per cent cost 2.5 points more than puts on Monday. The difference rose to 4 points on August 15, the highest since January 2013.
The stock has jumped 9.9 per cent since August 14, compared with a 0.6 per cent decline on Hong Kong's benchmark Hang Seng Index, as the company said it would offset less of the price of customers' devices.
"The cut in handset subsidies is a major change in strategy," said Victor Yip, an analyst at UOB Kay Hian Holdings. "Revenue from the mobile data services business also looks encouraging. The take-up for its 4G mobile services also looks decent."
China Mobile would spend 21 billion yuan (HK$26.4 billion) on subsidies this year, compared with the 34 billion yuan it had planned, chief financial officer Xue Taohai said last month.
China Unicom (Hong Kong) and China Telecom Corp would also reduce subsidies after regulators told the country's biggest carriers to cut costs by 40 billion yuan in three years because of over-spending on incentives and marketing, people familiar with the matter said in July.
UOB Kay Hian is among the 53 per cent of brokerages covering China Mobile that recommended the stock as of Monday, compared with 40 per cent before the subsidy cuts and first-half results were reported on August 14. The average price target grew to HK$94.21 from HK$83.67 in the same period.
Net income at China Mobile would bottom out in the second half of 2014 as the take-up of 4G mobile services accelerated and the firm cut marketing expenses, Barclays said in a note. The brokerage has upgraded the stock to overweight from underweight.
China Mobile's profit will fall 11 per cent to 108.4 billion yuan in 2014, according to the average estimate by analysts. Profit would be little changed next year before climbing 5.1 per cent to 114.1 billion yuan in 2016, estimates showed. Net income fell 7.8 per cent to 32.5 billion yuan in the second quarter from a year earlier, according to figures derived from six-month results.
"China Mobile will struggle to maintain decent profit growth," said Ben Kwong Man-bun, a director at KGI Asia. "The telecommunications industry is very competitive."
China Mobile's market share on the mainland has fallen to 63 per cent in July from about 73 per cent five years ago.