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China Mobile (CHL) Faces US Entry Setback on Security Issues

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Adding pressure to the already strained relationship between the United States and China, the Trump administration has sought to block the entry of China Mobile Limited (CHL - Free Report) in the country, citing security concerns. The stock fell sharply on the news in local bourses and is likely to continue its downtrend in the U.S. market as well.

China Mobile is reportedly the largest telecom carrier in the world with about 899 million subscribers. It had filed an application with the National Telecommunications and Information Administration (“NTIA”) to offer telecommunication services between the United States and other countries.

The long-pending application is proposed by NTIA as one that should be summarily rejected by the telecommunications regulator Federal Communications Commission (“FCC”). The agency argued that China Mobile Communications Corp, a state-controlled firm, owned almost 73% of China Mobile and would provide the Communist government undue access to the U.S. telecom market for economic espionage and intelligence collection. It further added that the company posed a national security threat and law enforcement risk given its profound influence and control by the Government of China, a view that FCC is surely going to take into account.

The strategic move is likely to add fuel to fire as the two warring countries are set to impose trade tariffs on each other from Jul 6. While the Trump administration has decided to impose $34 billion worth of tariffs on China from Friday, the latter has promised to retaliate on similar counts. Trump has further threatened to impose additional tariffs worth $200 billion if China strikes back.

To make matters worse, the embargo on ZTE Corp, a leading telecommunications equipment manufacturer in China, is yet to be fully resolved. The Commerce Department had earlier issued a seven-year ban on the China-based firm related to the purchase of components from U.S. manufacturers that threatened its survival and crippled operations. ZTE is in the process of getting the ban lifted and restructured its management last week as part of the settlement process.

Although the issue relating to China Mobile in not as threatening as ZTE, as the former generates the lion’s share of revenues from the domestic operations, it sure has ruffled the feathers of the top brass of both the countries.

The stock has underperformed the industry in the past year with an average loss of 16.3% compared with a decline of 13.1% for the latter. It remains to be seen whether the stock further plunges in the near term post the recent developments.


 

China Mobile currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader industry include Comtech Telecommunications Corp. (CMTL - Free Report) and Motorola Solutions, Inc. (MSI - Free Report) , sporting a Zacks Rank #1 (Strong Buy), and Ubiquiti Networks, Inc. (UBNT - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Comtech Telecommunications has a long-term earnings growth expectation of 5%. It surpassed estimates in each of the trailing four quarters with an average positive earnings surprise of 123.7%.

Motorola has a long-term earnings growth expectation of 8%. It surpassed estimates in each of the trailing four quarters with an average positive earnings surprise of 12.1%.

Ubiquiti Networks has a long-term earnings growth expectation of 18.6%. It topped estimates thrice in the trailing four quarters with an average positive earnings surprise of 8.9%.

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