China Mobile's return to A has not been broken, why has the operator's valuation been delayed?

Economic Observation Network reporter Shen Yiran On January 5, China Mobile (600941) was officially listed on the Shanghai Stock Exchange, and the listing ceremony was broadcast live at the Beijing headquarters.

On the screen, Yang Jie, chairman of China Mobile, wore a red scarf and made a listing speech with a smile, he regarded the return of China Mobile to A as a "historical moment", China Mobile had become the first stock of the overseas listing of central enterprises in 1997, and today China Mobile landed on A shares, and became the first share of a red-chip company to return to the A-share main board.

What makes investors happy is that China Mobile's A-share opening price is 63 yuan per share, up 9.41%, and it has not repeated the previous experience of China Telecom's break. At the same time, the hong Kong stock China Mobile (00941) opened high in early trading, rising more than 7.5% at one point. As of press time, the price of A shares is 60.40 yuan per share, and the total market value is about 1.28 trillion yuan.

At the scene of the Beijing live broadcast, an A-share shareholder who won the lottery for China Mobile told reporters that he was "very happy that there was no breakage." Previously, China Mobile was abandoned by nearly 700 million yuan. Another winning shareholder told reporters that the stock price expectations of China Mobile are not high, mainly focusing on the company's dividend ability and monopoly industrial position, and is more inclined to buy the company's stock as financial management.

Operators play an important role in the communication era by undertaking the function of building and operating communication networks, but why is it that in the capital market, their valuations are not recognized for a long time?

Communications expert Ma Jihua told reporters that the industrial chain of the mobile Internet in the 4G era is composed of networks, terminals and applications, operators are in the network link, and the business model is similar to "pipeline", so the global capital market generally believes that the profit space of the link is insufficient, and the valuation given is generally low. In A-shares, even if investors do not consider the rebound in valuation, that is, the company is still in the position of pipeline infrastructure, it can also be used as a conservative and wealth management investment.

In Ma Jihua's view, the technical characteristics of 5G distribution determine that operators will become a more important "participant".

At present, the three operators have large-scale scenario pilots in the field of 5G, and an operator told the Economic Observer that the above pilots cannot all guarantee profitability, but also need a screening process, and its benefits will also be "long-term".

In Yang Jie's view, the return to A is another milestone in the company's development history, marking China Mobile's successful construction of a domestic and foreign capital operation platform, laying a solid foundation for the company to promote digital and intelligent transformation and accelerate high-quality development.

Why are valuations undervalued?

As of press time, China Mobile's A stock market is worth 1.28 trillion yuan, and the Hong Kong stock market is worth 1.02 trillion yuan. Ma Jihua said that compared with the company's asset value, the company's market value has been at a low level, and the downside is very small, it can be said that China Mobile and its operator sector are undervalued in the Hong Kong stock and A-share markets. But at the same time, China Mobile's dividend ability is very strong, according to calculations, China Mobile Hong Kong stock dividend income is about 7% annualized.

CICC, one of the lead underwriters, said at the listing ceremony that the return to A-shares is an important embodiment of the implementation of the national strategy and a re-entrepreneurship to deepen the country's reform and development. Yang Guang, a wireless analyst at StrategyAnalytics, said that from an operational point of view, China Mobile's current demand for funds is not large. However, after all, the market of operators is mainly in China, and mainland investors will be more likely to understand the operator's business strategy and market environment, and returning to A will also help to push up valuations.

China Mobile's offering price is 57.58 yuan per share, and it is expected to raise about 56 billion yuan, which is less than 1/3 of the company's annual capital expenditure. According to the prospectus, from 2018 to 2020, the company's capital expenditure amounted to 167.1 billion yuan, 165.9 billion yuan and 180.6 billion yuan, respectively. At the same time, the company's cash flow is stable, according to the prospectus, from January to June 2021, the company's net cash flow from operating activities was 161.6 billion yuan.

In the field of communication services, China Mobile is dominant. According to the prospectus, as of the end of June 2021, the company had 946 million mobile customers and a market share of 58.42%; Among them, the number of 5G package customers reached 251 million, and the market share was 50.63%. The number of wired broadband customers was 226 million, and the market share was 47.01%.

However, Yang Guang said that in the context of the peak of the mobile dividend, China Mobile is saddled with certain profit pressure. According to the prospectus, from January to September 2021, the company's revenue was about 648.6 billion yuan, an increase of 12.92% year-on-year, the net profit was about 87 billion yuan, an increase of only 6.59% year-on-year, and the net profit attributable to the shareholders of the parent company after deducting non-recurring gains and losses was 80.758 billion yuan, an increase of only 3.57%.

Ma Jihua said that in the 2G and 3G era, operators still occupy all the value from the network, applications, and terminals, but in the 4G era, the maximum value of the application side is occupied by the Internet, which is very unfavorable to operators, which is also a reason why operators are generally limited in the valuation of the 4G era.

Can valuations rebound in the 5G era?

"If mobile companies are marginalized in the 4G era, then in the 5G era, it will have the opportunity to become an important player again," Ma Jihua said.

Today, in order to seek room for growth, China Mobile is expanding itself to a larger scope - the foundation of the digital economy, providing solutions for the digital upgrading of individuals, families, enterprises and cities. Implemented into business, China Mobile has divided four directions: individual, family, government and enterprise, and emerging. At present, the individual market is still the pillar of revenue, but in the context of industrial digitalization, the company is making efforts to strengthen the government and enterprise market.

Among them, 5G is not only the core capability of operators, but also an important starting point for strategy. Compared with 4G, the biggest change in 5G is that it can bring about a society where everything is interconnected, and it requires cross-border integration of the communication industry and traditional industries, which has the opportunity to bring more industry revenue to operators.

After two years of commercial use, China's 5G has landed thousands of application scenarios in hundreds of industries. According to the prospectus, in terms of 5G vertical industries, the company focused on 18 sub-industries, precipitated more than 100 5G application scenarios, accumulated 200 group-level leading demonstration projects, and expanded more than 4,000 5G vertical industry projects.

An operator told reporters that this does not mean that all scenarios can be converted into revenue, the vast majority of applications are currently commercial pilots, operators need a large number of screening pilots, retain just need, good profit prospects of the project, operators in the industry side to obtain benefits is also a long-term process.

Yang Guang said that at present, whether China Mobile can do industry business, there is still uncertainty, the biggest difference between the industry and consumer business is that it points to a long-tail market, fragmented, different vertical industries have highly customized needs, the need for more flexible business, the technical ability of service providers is also higher.

Not only is the model more complex, China Mobile has also entered a new stage in ecological cooperation, in the past, the company purchased equipment from the equipment vendor, and then joined hands with the Chinese tower for base station construction, and now in the government and enterprise affairs, the company's 5G, cloud, IDC business, need to cooperate with equipment vendors, system integrators, and jointly serve customers, in the new ecosystem, the company also has to face Huawei, Inspur and other strong opponents.

Ma Jihua said that unlike the platform-based model in the 4G era, the 5G ecosystem is more distributed, whether it is operators, equipment manufacturers, terminal enterprises, and the Internet, it is difficult to form a unique form, and the future needs to be developed by multiple parties. As an operator, China Mobile is at least a very important player.