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Apple: Sizing The China Mobile Opportunity

 November 09, 2012 01:58 PM
 


(by Mani) Apple, Inc. (NASDAQ: AAPL) plans to launch iPhone 5 in China this December quarter, likely with China Unicom and China Telecom. The potential deal between Apple and leading Chinese carrier China Mobile is on the cards, and if it materializes, it could double the sales of iPhone in China, the world's most populous country.

China Unicom started selling iPhones in the fourth quarter of 2009, while China Telecom began supporting iPhone in the first quarter of 2012. In this backdrop, let's assess the impact on Apple in 2013 if China Mobile carries iPhones.

China Mobile is the largest mobile operator in the world, with 699 million subscribers and 75.6 million 3G customers. China Mobile with its nearly 700 million subscribers is the largest carrier in China with 65 percent market share, followed by China Unicom (21 percent) and China Telecom (14 percent).

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"We estimate that 10–16M iPhones could be sold to China Mobile subscribers within the first 12 months of availability. The biggest hurdle continues to be subsidy agreements with the carrier," RBC Capital Markets analyst Amit Daryanani said in a client note.

China Mobile could have 108 million 3G subscribers by 2013, and about 13 percent of them conservatively could adopt iPhone if the carrier and Apple come to a pricing agreement.

"In this scenario, we estimate that the addition of China Mobile would add ~$3+ to Apple's annual EPS or $45 to the company's stock price," Daryanani said.

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For comparative purposes, China Unicom and China Telecom combine for 382.1 million subscribers and 126.6 million 3G customers. The 3G market is most significant, and addition of China Mobile would be a material positive i.e. equivalent to adding two of the top 20 carriers in the world.

The two biggest drivers to EPS from the addition of China Mobile are the long-term margin profile of the phones and the penetration rate at the carrier.

"We believe AAPL could generate incremental EPS in a range of $2.50–3.50 for the first full 12 months with China Mobile. In the company's most-recent 10-K filing, AAPL noted that 2% of taxes were paid on foreign revenue, which drives the EPS line a bit higher than sales in the US," the analyst noted.

Interestingly, the market share is more evenly spread out among the three carriers on the 3G side, where China Mobile has 37 percent market share, followed by China Unicom at 33 percent and China Telecom at 30 percent.

"We estimate that 3G penetration currently stands at ~19% in China, but that base is growing at a 30–40% rate on a y/y basis," Daryanani said.

According to Strategy Analytics, smartphone penetration rates in North America and Western Europe should surpass the 50 percent mark by the end of the calendar year. The penetration rate is expected to increase as we continue into 2013 and beyond, which is particularly important for long-term iPhone unit sales.

In addition, China is expected to see penetration rates increase to 18 percent in 2013, up from 13 percent in 2012 while the Asia Pacific region is expected to add 260 million smart phone units over the next five years, and this opportunity is about 5 times larger than North America.

According to Gartner data as of June 2012, Samsung currently leads the pack in terms of market share within China with 18 percent, followed by Apple at 12 percent and Lenovo at 11 percent.

"We believe Apple can continue to gain share in the future, ~100–200bps on an annual basis, as it is can partner with China Mobile and China's subscriber base moves from largely 2G today to 3G and over time to 4G," Daryanani wrote.

Meanwhile, the adoption of the iPhone at AT&T, Inc. (NYSE:T) and Verizon Communications (NYSE:VZ) should serve as a proxy for the penetration rate at China Mobile. Notably, the growth at AT&T has continued through Apple's fiscal 2012 with cumulative iPhone sales growing to 63 million, up 48 percent from 43 million during the prior year.

In addition, the growth at Verizon has continued with quarterly iPhone increasing to a 3.3 million run-rate during Apple's fiscal 2013 versus 2 million in fiscal 2013.

"Assuming that a similar growth profile is achieved at China Mobile, we would not be surprised to see 10M+ phones sold in the first 12 months of availability as a low-end estimate (~13% penetration)," the analyst said.

Apple announced iPhone 5 during the Sept. 12 press conference held in San Francisco. The latest iPhone came with a new form factor with 4-inch display; LTE capabilities (available on Sprint, AT&T, and Verizon); A6 chip (A6 2x faster CPU and 2x graphics performance relative to the A5); 18 percent thinner and 20 percent lighter; and new lightning connector.

In addition, the iPhone 5 is currently available in over 20 countries, and by December 2012 the company expects the iPhone 5 to be available in 100 countries.

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