China Mobile (NYSE: CHL ) has had a torrid ascent so far this year, with its shares up nearly 100%. Yet amid a flurry of recent updates by Wall Street analysts, Deutsche Bank (NYSE: DB ) is thus far the only one to wilt under the heat, citing valuation concerns in cutting its recommendation from buy to hold.
China Mobile's competitors have been feeling their own sort of heat from the company's blistering pace of user and share growth. So far this year, it's captured more than 5 million new users per month. Even better, it signed up nearly 80% of all new mobile users in China, better even than its own estimate of 67.5% market share back in December 2006. That leaves China Unicom (NYSE: CHU ) , its only real mobile competitor, with a very tepid gain of just more than 20% of new mobile users, against its roughly one-third share at the beginning of the year.
In a hot developing-market category like mobile phones, incremental share gain is a strong indicator of competitive moat-building. As in any land grab, the first to stake out new territory is often the one to most enjoys its fruits. China's mobile market started the year with 66% prepaid users, who tend to be budget-conscious customers who don't use their phones often. Through August, 79% of all new users were prepaid ones, the result of further penetration. China Mobile, starting the year with an 81% share of existing prepaid users, hot-footed to a 91% share of new prepaid users by August. China Unicom, meanwhile, starting with 57% of existing contract users, had captured 75% of new contract users year to date by August. China Unicom is effectively being marginalized in the dominant and fastest-growing prepaid user segment by China Mobile's near-monopolistic land grab.
Since the Chinese government imposes controls that discourage price wars, China Unicom apparently resorted to giving a free crate of beer to new subscribers. China Mobile, not to be outdone, promptly upped the ante to two crates. In other areas, they've been dishing out towels, umbrellas, cooking oil, and woks.
Among fixed-line providers, market leader China Telecom (NYSE: CHA ) gained about a million subscribers in the first half of 2007, while China Netcom (NYSE: CN ) lost subscribers. Both are getting singed by the fiery exchange between China Mobile and China Unicom while the fixed-line forms await a government overhaul of the country's telecommunications setup and the issue of 3G licenses. A recent announcement by China's National Audit Office of its plans to audit the telecom companies fanned the flames of restructuring speculation, fueling expectations of mergers between the mobile and fixed-line companies.
Hong Kong ahoy
The other factor pumping hot air into this and other Hong Kong-listed H shares is the recent decision by China's currency regulator allowing mainland nationals to buy foreign-currency shares in Hong Kong. Naturally, speculators will try to bid up those shares in anticipation of a bonanza. Even then, several analysts quoted in Barron's think that Hong Kong-listed H shares are trading at a significant discount to their mainland A-share equivalents. Of course, that might be just a creative way of justifying those high A-share prices.
Despite the searing growth in China's mobile user numbers, the market remains quite underpenetrated, enabling a high yield on aggressive category-development strategies. China Mobile's dominant share of existing users, coupled with an even more dominant share of new ones, bodes well for the defensive width and depth of its moat.
Naturally, forecasting such blistering performance is not easy -- let alone trying to put a value on it. By definition, such fast-moving emerging-market stocks will continue to be subject to wild swings, and their valuations will often be speculative.
If you want to win long-term in such a pressure cooker situation, you have to stay cool.