Lifting the hood on China Mobile Limited (CHL)

Several emergingmoney.com readers have been asking about how to trade China Mobile Limited (CHL, quote), so here it is.  Feel free to continue to log your requests via @rrittorno.

China Mobile Limit

Executive Summary:
China Mobile Limited (CHL, quote) provides a wide range of mobile telecommunications services in 31 provinces, autonomous regions and directly administered municipalities in the People’s Republic of China, including Hong Kong Special Administrative Region of the People’s Republic of China.

As of March 31, 2011, its total number of customers was approximately 600.8 million and China Mobile Communications Corporation (CMCC) owned 74.2% equity interest in the company.

CHL offers mobile telecommunications services using the global system for mobile communications (GSM) protocol. CHL’s businesses consist of voice services and  the typical value-added services within the telecommunications industry: data, content, hardware resale.

Overall Valuation: CHL is in the communications services industry and has positive earnings, so the PEG, PE, and price-to-book ratios are the most appropriate valuation measures. On that basis, CHL seems expensive with a PEG value of 7.1284, one of the highest in the communications services industry; however, the PE is only 9.9798, well below the global industry average of 12.22 as well as historical standards for this company.

Profitability:  Looking at CHL’s gross margin, operating margin and net margin, it appears that management is converting a larger percentage of its revenues to profits than most other companies in the communications services industry. CHL is profitable with an operating margin of 30.14%.

Yield/Dividend: CHL pays an annual dividend of $2.04, which at its current price of $47.77, yields 4.27%, a level that is in line with the communications services industry average and is well above the average S&P 500 yield of 2.19.

Financial Strength: CHL holds a substantial amount of cash and cash equivalents on its balance sheet. These liquid assets can be used to fuel growth, pay dividends and limit financial risk

Quick rundown on technicals:

After a hitting a 52-week high of $51.98 on September 14, CHL price action pulled backed slightly and began to trade sideways within a channel ranging from $46.30 on the low end to $50 on the high end.  Within the channel, the 150-day moving average acted as support until recently, providing traders a channel with a channel. 

Price has now turned around from the bottom of the outer channel and is bumping up against the 150-day moving average in anticipation of a potential move back toward the upper half of the channel.

The channel sits right in the middle of the Fibonacci upward wave, which is suggesting a breakout above the price channel.  The fuel gauge (blue dotted line above; click to enlarge) is confirming a move higher and price has closed above the T3 Tilson for the second day.  

A few possible scenarios:

  • CHL can easily continue for some time within the price channel allowing traders to buy at the bottom and sell at the top.
  • Price will resume the previous direction — which in this case is higher — and traders can consider placing a buy stop order above the upper range of the channel to capture a price move towards the Fibonacci channel target of $56.30 at the -1.618% extension.
  • Bearish traders can consider using the same scenario as above — simply revise the trade at the bottom of the trading range.

Summary: CHL continues to remain in the a channel providing channel traders a possible set up. More directional traders can place stop entry orders on either side of the channel looking for the break out.