Is China Mobile a risk for China-focused funds?

In Hong Kong, 195 funds belong to the China, Greater China and Hong Kong equity categories, according to FE data. Forty of them have more than 3% of their assets in the red chip, state-owned company.

China Mobile is also one of the top 10 companies that is widely held in emerging market equity strategies globally, according to an Evestment report. Around 40% of emerging market equity funds are invested in the stock. The average allocation for those funds that have the stock in their portfolios is 1.82%.

Therefore, any sharp movements in China Mobile could have an impact on multiple funds across asset classes. However, Morningstar believes China Mobile, despite being a state-owned enterprise, carries low risk.

One risk that could impact the stock price is regulatory change, which is unpredictable, according to Dan Baker, Hong Kong-based director for equity research at Morningstar Investment Management Asia.

However, when regulations changed in the past, there was little impact to the company’s share price. “It does impact the earnings and revenue growth of the company, but not so much,” he said.

Citing an example, Baker said the Chinese government recently cut the prices for long distance calls and  roaming outside China. Earnings growth slowed for a short period of time.

He believes the company is resilient, especially since China is growing fast. It is also a defensive stock, which means it could still perform well even in a bearish market. During the financial crisis when manufacturing slowed in China, the mobile phone service industry was not severely impacted, he added.

This year, the company has been performing well. Baker expects that for the full year 2017, revenue will be up 5.6% to RMB 748bn ($112.81bn). He also expects revenue to grow in 2018 year-on-year to 3.9%.

Besides increasing revenues, Baker said that the company has raised its dividend payout ratio. China Mobile increased the dividend payout ratio to 46% in 2016 from 43% in the previous year. This year, the company committed to the same 46% payout ratio.

The company, since it is state-owned, is also protected from competitors entering the market, he added.

He also argues that China Mobile is relatively a non-volatile stock compared to most mainland equities. However, the company has a huge net cash pile, which he believes should be paid out to shareholders.

“There is nothing much that the company could do to invest all that money. Maybe there is a gradual move toward doing it, but probably not in the pace that people expect.”

Fund performance 

Around 66% of the 40 China-, Greater China- and Hong Kong-focused funds that have more than 3% of their assets in China Mobile outperformed their respective average category on a three-year annualised return basis, according to FE data.

However, having a huge exposure on the stock does not indicate whether a fund will outperform. Out of the 11 funds that had more than 6% allocated in the stock, only three funds outperformed their sectors.

Source: FE Analytics. All fund NAVs converted to US dollars.

Sector performance

Source: FE Analytics. In US dollars.