China Mobile Calls Rise to Seven-Year High on 4G Network: Option
Feb. 8 (Bloomberg) -- The number of bullish options on China Mobile Ltd. jumped to a seven-year high relative to bearish ones amid speculation the company will move to a fourth- generation network to stem declining market share.
The ratio of outstanding calls that give the right to buy China Mobile shares versus puts to sell climbed to 1.21-to-1 yesterday and reached 1.31 on Jan. 29, the highest since December 2005, according to data compiled by Bloomberg. The stock gained 1.5 percent from its Jan. 25 low through yesterday.
China Mobile, the world’s largest phone company by subscribers, is seeking to fend off competition as other carriers offer Apple Inc.’s iPhones. China Mobile Communications Corp., the state-owned parent of China Mobile, finished first- phase trials of the 4G system in six cities with 850 base stations in September 2011. The trial was due to expand to 20,000 base stations by the end of 2012 and to reach 200,000 base stations this year, the company said in August.
“It serves as one of the milestones that the trial network will start taking more users to test the network,” Victor Yip, a Hong Kong-based analyst at UOB Kay Hian Ltd. who has rated the company a buy with a target price of HK$100, said in a telephone interview Feb. 6. “I would say at this stage the stock is fairly valued to slightly inexpensive.”
The number of outstanding calls almost doubled this year to 193,652 yesterday, data compiled by Bloomberg show. That compares with a 65 percent gain in put open interest to 159,592. Ownership of bullish contracts reached 236,582 last month, the most since September 2008, according to the data.
The four most-owned options were bullish. February HK$95 calls, with an exercise price 11 percent above yesterday’s close, had the largest open interest, followed by February HK$92.50 calls and February HK$90 calls, the data show.
“China Mobile keeps going down from the beginning of the year from the top around HK$92,” Edmond Lee, a director in global equity flow at Societe Generale SA, said in a telephone interview Feb. 5. “A lot of people are looking for the rebound and they keep accumulating stock and warrants.”
Turnover in warrants has increased significantly since the beginning of the year, Lee said, signaling further bullish sentiment from investors. Warrants on China Mobile typically account for between 15 percent and 16 percent of the total value of the products traded in Hong Kong, Lee said. They accounted for 20 percent in January, he said. The most popular warrants have expiration dates in June and early July and a strike price between HK$90 and HK$100, Lee said.
“We see the demand on warrants is huge,” Lee said. “And people aren’t just trading, they are buying and holding for quite a while.”
Of all the China Mobile warrants outstanding in Hong Kong, 74 are puts and 225 are calls.
Warrants are options mass marketed to retail investors who can choose to buy contracts that will profit if stocks rise or those that make money when the underlying security falls. If the contracts would incur a loss, they lapse and the investor loses the price, or premium, paid. If they will make money, then the issuer automatically executes the contract and pays the profit to the holder.
Rainie Lei, a spokeswoman for China Mobile, declined to comment on options trading on the stock when reached by telephone.
The Ministry of Industry and Information Technology, which grants 4G licenses, has not given a timeframe for when the licenses will be issued.
Analysts are split on prospects for the stock, with 17 rating it a buy, 11 rating it a hold and 8 rating it a sell, according to data compiled by Bloomberg. JPMorgan Chase & Co. analysts led by Lucy Liu downgraded China Mobile on Jan. 24 to sell saying that the company will likely post its first negative profit growth in 2013.
“We believe the market is still holding a false premise about 4G return and earnings impact to China Mobile,” the JPMorgan analysts wrote in a research report. “While we reckon the expectation of better market-share momentum post 4G- licensing could fuel a sentiment ride of the share price,” the stock price will ultimately depend on earnings, return and free cash flow after the initial gain.
The share price of China Mobile has fallen 5.5 percent this year, more than any other Chinese communications company. While China Mobile is unable to support Apple Inc.’s iPhones on its existing third-generation network, China Unicom (Hong Kong) Ltd. and China Telecom Corp., the nation’s second- and third-largest carriers, both offer iPhones.
China Mobile will report its full year earnings next month. Capital expenditures will likely swell to 131 billion yuan ($21 billion) from 124 billion in 2011, according to the average estimate of 17 analysts surveyed by Bloomberg. Net income will likely grow 0.4 percent to 126 billion yuan, according to the average estimate of 33 analysts.
The nation’s largest mobile phone operator traded at 10.8 times average estimated earnings compared with 11.3 for the benchmark Hang Seng Index and a multiple of 13.6 for the Standard & Poor’s 500 Index, data compiled by Bloomberg show.
The HSI Volatility Index, which tracks the cost of options on Hong Kong’s benchmark gauge, fell 0.8 percent to 14.22 yesterday. Europe’s VStoxx Index, a measure of Euro Stoxx 50 Index derivative prices, advanced 2.9 percent to 20.80. In the U.S., the Chicago Board Options Exchange Volatility Index, known as the VIX, gained 0.7 percent to 13.50.
Options traders have been pushing up the cost of bullish China Mobile options. Calls betting on a 10 percent rally cost 5.3 percent more than puts protecting against a 10 percent decline, according to one-month implied volatility data compiled by Bloomberg. The gap reached 31 percent on Jan. 28, the most since May 2011.
“The market is focusing on the coming final result to see whether they will step up their capital expenditure and also whether they acquire the 4G network from their parent,” Benjamin Tam, a fund manager who helps oversee about $1.5 billion at IG Investment in Hong Kong, said by phone on Feb. 6. Investors “used to buy China Mobile because they had lots of cash on hand and a strong cash flow; now the company might need to invest heavily on the new network.”
--With assistance from Edmond Lococo in Beijing and Cecile Vannucci in Amsterdam. Editors: Lynn Thomasson, John McCluskey