Slowing Growth for China Mobile

Robert Hsu, September 15, 2009

Just 10 years ago, hardly anyone had a cell phone. Today, you can't walk down the street or in a grocery store without running into someone who's talking on his or her cell phone. This has been an incredible trend over the years, and wireless service providers have profited handsomely.

So to take advantage of this powerful trend, I first recommended China's largest wireless telecommunication operator as a way to take advantage of what was once a virtual monopoly. In fact, China Mobile (NYSE: CHL) has been a core holding of the China Strategy portfolio since we began the service in late 2005.

To give you an idea how popular cell phones were in China when I first recommended China Mobile, in 2004 one of the highest grossing movies there was Handset, which depicted the significance of cell phones in the lives and affairs of urban Chinese professionals.

And China Mobile was the number-one choice for wireless services to the vast majority of Chinese at a time when cell phones were the hot item. That's because China is a culture where large extended families are idealized and whom you know is often more important than what you know. As a result, staying "connected" is one of the highest priorities. That's why most people considered cell phones a necessity and wanted the latest, greatest features.

And though China Mobile remains the world's largest wireless service provider with some 493 million customers, recently CHL's growth had slowed. So I began researching the matter and asked my boots-on-the-ground research team in China for a more in-depth update on the company.

What they discovered was that the Chinese wireless market is becoming increasingly saturated -- and that policy makers have become wary of the company's earlier domination of China's telephone services (one primary reason why we originally invested in CHL).

And then, when the company announced earnings results for the latest quarter, they posted their first decline in profits since 1999 -- citing a stall in growth and increased competition. In fact, the company only added about 16 million users in the second quarter, compared with 22.5 million year-on-year. Coupled with an average monthly phone bill plunging by 11% due to intense competition from China Telecom entering the mobile-phone market, I see very limited upside to the company.

And while China Mobile will offer 3G services in 238 cities by October, few customers are upgrading because of the company's less reliable homegrown TDS-CDMA technology.

So it's time to take our profits and move on to the next opportunity. I recently recommended my China Strategy readers sell China Mobile -- and we booked gains of 109%!

Since then, the stock has already dropped more than 8% and is sinking fast. So I don't want you to miss out on my next buy and sell recommendations -- join us at China Strategy today!

Sponsored Links

What's happening in the world's major foreign markets right now? Will current events affect the stocks in your portfolio? Read InvestorPlace Asia's Top Stories to find out everything you need to know in order to stay on top of global economic news.

more...

Every country has its own special customs and traditions. Being familiar with a country's culture can often make a difference in whether you gain or lose from investing in its stock market. Check out our culture section to learn more about the societies of the world's fastest-growing emerging economies.

more...

There's a lot happening around the world today, and it's important to know how it's affecting your investments. Watch the latest videos covering important Asia topics!

more...