With the Lunar New Year now upon us, we wish our clients, friends and families a Happy Chinese New Year! The Year of the Pig is believed to be a symbol of optimism, enthusiasm and hard work. May the year be filled with happiness, health and prosperity! We also thought it would be a good opportunity to highlight our top pick for 2019 that happens to originate from China.
China Mobile (CHL) is our top pick for 2019 and our largest equity holding. CHL is a Chinese state-owned telecom company and is the world’s largest mobile phone operator, with over 925 million subscribers. In August 2018, the Company announced that it may spin-off three or four subsidiaries that in our view would unlock the value of its overall business. CHL has generated a median 12% return on invested capital over the past five years, and currently trades at just 10x forward earnings with a 4% dividend yield.
With the mobile phone market maturing as exhibited by slowing sales globally, the future growth will be driven by other devices such as autonomous vehicles or Internet of Things (IoT) devices being connected to mobile networks. However, the current 4G mobile technology will not provide sufficient speed and latency for these devices, which is where the push for 5G has arisen, since 5G can provide speeds up to 20Gbps and 1ms latency. As a side note, latency is the delay before the transfer of data begins. The lower the latency, the faster devices will communicate with one another. Imagine an autonomous vehicle on the road that stops suddenly because its mobile 3G/4G network connection does not send or receive data quickly enough for it to make a decision. This explains why we will not see broad adoption of autonomous vehicles until 5G becomes widely available.
It is not surprising that the leading global 5G player Huawei Technologies is now being scrutinized for what the US claims are stolen trade secrets and the violation of Iran sanctions. The US government and US-based technology giants are terrified of missing the boat on 5G and it is certainly plausible that there has been a great deal of lobbying by US-based technology giants to dig up any dirt that can be found on Huawei. In contrast, Canada’s Telus (T) has come out defending Huawei and its partnership on 5G indicating that Huawei has a 12-18 month innovation lead on its competitors. Regardless of what happens with Huawei globally, it speaks to the importance of 5G leadership, and the Chinese government will ensure that Huawei pushes ahead aggressively in China with its 5G deployment. For example, the Fangshan government and China Mobile recently outfitted a 10-kilometre road with 5G cell towers to test out wireless communications with autonomous vehicles.
China will be the leader in 5G and CHL is well-positioned to outpace the growth of other global mobile operators that refuse to use the leading Huawei technology. Greater China is forecast to have 4.1 billion IoT devices by 2025, representing 20-30% annual growth. In fact, the Chinese government highlighted in its ‘Made in China 2025’ plan, a strategy to dramatically increase the integration of traditional industries with the internet. CHL will provide the backbone for this ambitious plan and we expect CHL shareholders will benefit.