The Tycoon Report

ANOTHER BRICK IN THE WALL: Want to say “Easy Money” in Chinese?

If you want to learn to speak Chinese, here’s your first lesson.

Roughly translated, “Easy Money” is “China Mobile!”

Hey folks, I hope everybody had a great holiday and a very happy new year. We’re hoping 2006 will be a banner year for everyone here at Tycoon Publishing -- which means a banner year for all of your portfolios as well. So I’d like to do something a bit different with my first letter of 2006. I’d like to take two subjects I’m extremely passionate about and give you folks a way to put a little something extra in your stockings for next Christmas.

As some of you may know, besides technology, I also have a deep interest in the Chinese language, culture and business environment. So I tend to keep my eye on a number of Chinese companies. Lately, many of them have gotten overvalued a bit too quickly for my taste. But every so often, the ball gets thrown at just the right speed and right across the plate. So what should you do when this happens? Obviously, you should pull out your biggest bat and swing for the fences, and that’s exactly what you should be doing with China Mobile (SYMB: CHL) this year. Let me tell you why ...

For starters, China Mobile is the largest provider of mobile phone service (voice, text and data) in Mainland China. It holds mobile licenses for the most affluent provinces, autonomous regions and municipalities. Altogether the company’s target market is roughly one billion people. In the areas it services, China Mobile has penetrated roughly 65% of the mobile phone market. This means that for every two people carrying a cell phone, at least one of them will be on the China Mobile network -- and the company is still growing.

Since 2001, China mobile has grown at approximately 18% per year and currently boasts almost 200 million subscribers nation wide! From a financial perspective, the company is rock solid. It’s been growing revenue and earnings on a consistently strong basis since 2001. It maintains high margins, returns on capital, and holds very little debt.

We don’t see much risk in this business, especially based on the current market prices of its stock. We’re expecting growth to slow slightly in 2006, but the company is still firing on all cylinders by attempting to lower costs and increase Annual Revenue Per User. With lower costs and higher revenues, we feel that China Mobile is setting itself up for a stellar year with increased profits and margins. Speaking of profits and margins, China Mobile maintains a Pretax Profit Margin four times larger than its nearest competitor, China Unicom. The company’s Pretax Margins are roughly 30%, and it has a Return on Equity of almost 20%, while China Unicom’s is closer to 6%.

What this means, folks, is that for every dollar China Mobile puts into its business, it creates $.20 in shareholder value. China Unicom, on the other hand, puts a dollar into its business and only creates $.06 in shareholder value -- Which company would you rather put your money into? Well, it all still depends on the price at which you can buy the stock, right? Just to give you folks some perspective, the stock is the same price it was about five years ago. However, the company’s revenue and profits have more than doubled. But I also like to see how a company is being valued relative to its peers.

So let’s take a look at China Mobile alongside China Unicom ...

Surprisingly enough, the weaker company, China Unicom, maintains a P/E of 22 ... China Mobile, however, only has a P/E of 15. If China Mobile were valued at a P/E of 20, and based on 2006 earnings estimates of $1.66 per share, we’re holding onto a $33.20 stock -- that’s almost a 40% profit based on earnings alone! We also know the company is positioning itself to take advantage of a number of growth opportunities in 3G wireless technologies. I feel that with China Mobile’s deep penetration of the more affluent markets in China, the company is definitely in a position to pursue these growth opportunities more aggressively than anybody else in the market.

With that being said, we are extremely bullish on this stock. We see blue skies ahead for the sector they participate in as well as the region. And folks, at this price, we don’t see much risk in buying China Mobile for your portfolio.

Until next time folks ...