Is Goldman Sachs Right about Upgrading China Mobile Ltd.?

I do not usually attach much importance to the opinion of Wall Street, brokerage firms and analysts about how a particular stock should be traded. This position is necessary when you consider the widely divergent views that analysts usually hold and the difficulties that surrounds the process of obtaining a consensus. Nonetheless, analysts’ upgrades and downgrades when examined in view of fundamentals can provide valuable insight into the direction of a stock.

China Mobile Ltd. (ADR) (NYSE:CHL) is a stock in the limelight because of a recent upgrade from a major brokerage firm. China Mobile with its market cap of $202.30 billion is an investment holding company. The company and its subsidiaries provide mobile telecommunications and related services in 31 provinces, autonomous regions and directly-administered municipalities in Mainland China and Hong Kong.

Analyst Upgrade

On Monday, Goldman Sachs upgraded China Mobile from a “Neutral” rating to a “Conviction Buy” rating. In addition to the upgrade, Goldman Sachs has a price target of $61 on the stock. The upgrade and new price target shows that the stock has a 21.9% upside on the $50.02 opening price on Monday. The new price target is also 12.94% higher than the consensus target price of $54.01. Shares of China Mobile gained almost 2% following the news of the upgrade but the stock is currently tanking 0.42%.

According to analyst Donald Lu, the upgrade is a function of four catalysts that will position China Mobile for growth in the next 12 months. The analysts:

  1. Expect rapid LTE adoption when the floor price of LTE smartphone reaches US$100 in 2H14.
  2. Forecast CM’s ARPU (ex-VAT tax reform) to stabilize or improve slightly yoy in late 2014 or early 2015.
  3. Expect the potential strong replacement demand for iPhone 6 to support LTE ARPU and help CM to gain market share.
  4. The potential commercial launch of VoLTE should further strengthen CM’s competitive stance, in our view.”

A Personal Take

The four potential catalysts for growth expounded by the analysts are quality drivers for growth. Nonetheless, I know a unique catalyst that could generate growth for China Mobile.

The unique catalyst for growth is Alibaba whose IPO is drawing closer by the day. U.S investors are fixated on Alibaba as the giant ecommerce site is working towards probably the largest IPO ever on American soil. Interestingly, some other investors are not waiting until Alibaba debuts before they start making gains on this giant. Traders who bought shares or options of Yahoo! Corporation prior to the Q1 earnings release will in no doubt smile to the banks because of the contribution of Alibaba to Yahoo’s top and bottom lines.

Interestingly, China Mobile is strategically positioned to record a change in fortune when Alibaba finally makes its debut. This potential change in fortune is linked to China Mobile’s development of 4G networks ahead of other Chinese telecoms competitors. 4G data networks is faster and more reliable than  the current 2G and 3G services and thus, I am optimistic about how the faster service will position China Mobile as a strategic enterprise partner as Chinese E-commerce and services sector grows.

How to Trade CHL Options

I am long China Mobile and call options are in the play for this stock. The stock is currently in overbought territory with an RSI of 75.67; hence, I will wait for the current pullback to end before initiating a position in the CHL Jan 2015 55.000 call (CHL150117C00055000). Buying the contract to open at the mid-range of $1.02 will cause the contract to break even when shares of China Mobile reach $56 apiece. Afterwards, we can expect an exponential increase in profits inasmuch as China Mobile trades above $56 until January 2015.

— Daily Option Alerts

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