Published On: Mon, Mar 20th, 2017

Will China Mobile surprise on Q4 earnings? — #SaxoStrats


As we wrote last Friday in our weekly Earnings Watch, China Mobile is scheduled to deliver its fourth-quarter earnings on Thursday with analysts expecting EPS down 10% (year-over-year) on a combination of reduced domestic roaming charges and year-end promotional discounts.

However, shares are up 3% today on news that China Shenhua has lifted payout, boosting expectations that China Mobile will do the same partly driven by lower capex guidance in line with what China Unicom published on March 16. 

Unicom’s result also shows that China’s telecom sector is in a good shape.

In addition to the recent positive news flow our quant model scoring global stocks across six equity factors has China Mobile in its top 20 list on Asia stocks (see table below). The recent for China Mobile’s high score is a combination of lower valuation than the industry norm (value) and recent underperformance compared to peers (reversal).

Ouant model on Asia stocks:

Source: Saxo Bank Quantitative Strategies 

Based on the past 12 months’ data, China Mobile is valued at 4.8x on EV/EBITDA. Just to understand the relative valuation, telecom carriers are valued on average at 6.7x on EV/EBITDA so there is a large discount to China Mobile’s business.

Our of 28 analysts covering the stock, 25 have a positive recommendation. If it proves the case that China Mobile surprises positively on Thursday, this could lead institutional investors to buy into the positive sell-side view.

Management and risk description

The biggest risk to this trade is the Q4 earnings scheduled to be released Thursday. A worse-than-expected outlook could easily send the shares down 5% to the levels seen in early March. Since we are implementing this trade with either CFD or cash stock (depending on the risk profile), there is a gap risk over the earnings release.

China Mobile weekly share price:

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Source: Saxo Bank


Entry: buy limit at 92 in case it jumps again tomorrow.

Stop: a tight stop is applied at 88.40 just below today’s low as short-term momentum is likely persistent as long as the share price stays above this level.

Target: the target is set to 105 which is above the recent highs back from August 2016 as we expect the stock to engage in a short-term breakout rally if it pushes through these levels.

Time horizon: short-term as this trade idea plays on Q4 earnings on Thursday and better than expected 2017 outlook.

— Edited by Michael McKenna

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