China Mobile launches A-share listing: "Making money" but not "cutting leeks"

On the evening of May 17, World Telecommunication Day, China Mobile issued an announcement on the Hong Kong Stock Exchange that it intends to apply for listing on the main board of the Shanghai Stock Exchange. The board of directors approved the proposal to issue RMB shares, special authorization and related matters.

The announcement shows that China Mobile plans to publicly issue no more than 965 million RMB shares, which is no more than 4.50% of the total number of common shares issued by the company (before exercising the over-allotment option). Subject to compliance with laws, regulations and regulatory requirements, the company may authorize the lead underwriter to exercise the over-allotment option, with the over-allotment not exceeding 15% of the number of RMB shares issued (before exercising the over-allotment option).

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After deducting issuance expenses, the raised funds are intended to be used for 5G boutique network construction projects, cloud resource new infrastructure construction projects, gigabit smart home construction projects, smart middle-office construction projects, and new-generation information technology research and development and digital intelligence ecosystem construction projects.

Why did China Mobile start returning to the A-share market at this time? What does this mean for China Mobile and the domestic telecommunications industry? How should ordinary investors view it? Are the stocks worth buying?

Cloud network expenses are huge, and even the largest operators are short of money

Data shows that China Mobile's operating revenue in 2020 was RMB 768.1 billion, a year-on-year increase of 3.0%. Among them, communication service revenue was RMB 695.7 billion, a year-on-year increase of 3.2%; EBITDA1 was RMB 285.1 billion, a year-on-year decrease of 3.7%; profit attributable to shareholders was RMB 107.8 billion, a year-on-year increase of 1.1%.

In terms of capital expenditure, China Mobile's 5G-related investment totaled RMB 102.5 billion in 2020. In September 2020, the cloud-based, centralized SA core network was put into use. About 340,000 new 5G base stations were built throughout the year, and a total of 390,000 5G base stations were put into operation, providing 5G services to all prefecture-level cities, some county towns and key areas across the country, and building the world's leading technology and largest 5GSA commercial network.

China Mobile's capital expenditure is expected to be 183.6 billion yuan in 2021, of which 110 billion yuan will be invested in 5G. It plans to build about 120,000 new 2.6GHz base stations and jointly purchase more than 400,000 700MHz base stations with China Radio and Television, which will be put into operation in 2021-2022.

With the large-scale production of 5G, related depreciation and electricity costs will increase significantly, and the increase in the scale of information service businesses such as DICT will also maintain a strong demand for transformation and upgrading resources. Faced with challenges and pressures, China Mobile has not yet had effective measures to increase revenue and reduce costs.

5G is not only expensive, but also has high operation and maintenance costs. However, 5G has not yet formed a positive business cycle and cannot bring scale benefits. At the same time, China Mobile is accelerating the construction of cloud infrastructure, optimizing the layout of network cloud, mobile cloud, and first-level IT cloud, promoting the intelligent transformation of the network, and promoting the integrated development of cloud and network integration.

Cloud and network are both heavy assets, and cloud expenditures are even greater than 5G. Taking China Telecom as an example, cloud capital expenditures account for more than 50%; Alibaba Cloud, one of the world's three cloud computing giants, announced last year that it would "invest 200 billion yuan in the next three years in the research and development of core technologies such as cloud operating systems, servers, chips, and networks, and in the construction of data centers." Cloud and network construction requires investment. It is said that Huawei Cloud, which has recently made major strategic adjustments, is also seeking to go public separately and seek help from the capital market.

Performance stabilizes, stock valuation has room to rise

The return of the "Big Mac" has attracted heated discussions in the investment circle, but there are different opinions on whether the stock is worth buying. The industry generally believes that China Mobile's performance has stabilized and rebounded, and the stock valuation has room for growth.

Data shows that in the first quarter of 2021, China Mobile's operating revenue was RMB 198.4 billion, up 9.5% year-on-year; profit attributable to shareholders was RMB 24.1 billion, up 2.3% year-on-year. At the same time, the Group accelerated its transformation and upgrading, promoted the all-round development and integrated development of CHBN, continuously optimized its revenue structure, and achieved steady growth in various revenues.

On May 18, Morgan Stanley published a report saying that assuming China Mobile (0941.HK) issues A-shares at a price-to-book ratio of 1 times in 2020, it is estimated that its "return to A" can raise a total of RMB 54 billion. The bank maintained its "overweight" rating and target price of HK$65 for China Mobile. On the 18th, under the influence of the news of the launch of the A-share listing, China Mobile's Hong Kong stocks opened high and closed at HK$50.1, an increase of 2.66%.

CITIC Construction Investment Securities Co., Ltd. published a report in January this year stating that the valuations of China's three major operators are at a historical bottom, lower than mainstream operators in Europe, the United States and South Korea. Based on CITIC Construction Investment's earnings forecast for China's three major operators' Hong Kong stocks from 2020 to 2022, China Unicom has a relatively high PE, and China Mobile has a relatively high PB, both lower than mainstream operators in Europe, the United States and South Korea.

The report is generally optimistic about the stock price trend of operators, especially China Mobile, and predicts that at least there will be no situation similar to "How much sorrow can you have? It's like having a full warehouse of PetroChina".

The three major operators have returned to the A-share market

Before China Mobile announced its return to the A-share market, China Telecom had already announced its return in early March this year. Prior to this, China Unicom had been listed on the Shanghai Stock Exchange Main Board. If China Mobile and China Telecom's "return to the A-share market" goes smoothly, the three major operators will gather in the A-share market.

The reason why operators are "returning to A-shares" is related to the delisting of the three major operators from the US stock market due to the US executive order. On December 31, 2020, Eastern Time, the New York Stock Exchange announced that it had initiated the delisting process for China Mobile, China Telecom and China Unicom. On the evening of May 7 this year, the three major operators issued announcements one after another, saying that the New York Stock Exchange maintained the delisting decision and the companies would be delisted from the United States, but the impact of the delisting was minimal.

On March 25 this year, at the 2020 annual earnings conference call, Yang Jie, chairman of China Mobile, responded to the rumors of "returning to A-shares" and said that "returning to A-shares" would be beneficial to the company's development and would also give customers more opportunities to share the benefits of the company's growth and development. China Mobile is actively tracking and timely studying and communicating relevant policies. Now, the details of the RMB share issuance have been released, and China Mobile has officially started the A-share listing.

At present, the three major operators are at a critical juncture of transformation and development and 5G network construction. Whoever can obtain more financial support will be able to take more initiative in the new competition. Some financial experts said that after the A-share market gathers, the capital competition among the three major operators in the capital market will inevitably heat up.