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By Mike Caggeso
China Mobile Ltd.'s (NYSE:CHL) 30% nine-month profit growth is just as impressive as it is worrying – to Warren Buffett at least.
The world's largest mobile-phone operator credited rapid subscriber growth and gains in value-added businesses for its growth, which has handed investors 120% gains on the company's stock since year to date.
To be clear, Buffet didn't cite China Mobile specifically when he warned investors to be "cautious" about investing in China, whose benchmark index has more than doubled this year. But its rapid growth was one of the many triggers of the famed billionaire's investment alarms.
"We never buy stocks when we see prices soaring," Bloomberg reported Buffett telling reporters yesterday in Dalian, northeastern China, home to a subsidiary of Berkshire Hathaway Inc. "We buy stocks because we're confident of the company's growth. People should be cautious when they see prices rising."
Right now, you can make a case for buying or selling China Mobile. On the plus side, its business is solid, and telecommunication customers are continuing to opt for cell phones over conventional landlines. For proof, note the poor nine-month 1.8% profit growth of China Telecom Corp. Ltd. (NYSE:CHA).
On the down side, like many Chinese heavyweights, China Mobile is trading at its peak. But many investors don't care about that as much as they care about what Buffett says. And since Buffett said to "be cautious," people will, and that'll help squeeze some of the air in China's bubble.
But as Money Morning reported in August, China Mobile has a possible Achilles Heel that could upend its massive growth. Only a small percentage of China Mobile's tens of millions of new users this year are contract customers. The large majority are pre-paid users, meaning they haven't committed to China Mobile as their long-term provider.
In contrast, American telecommunication companies lock customers in with term contracts that offer discounted prices. The point of the contracts isn't just to guarantee regular cash inflows, but also to make sure competitors don't get a cent of its customers' money.
China Mobile may be far ahead of its competition, but it's also giving them the opportunity to cherry pick its customers. Add a possible correction to the mix, and long-term China Mobile investors could see the stock's value ski down the mountain it quickly climbed this year.
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