Raymond James analysts Tavis C. McCourt and Daniel Toomey provide an outlook on the tech industry as they analyze potential catalysts for Apple Inc. (NASDAQ:AAPL)’s iPhone sales.
China Mobile launches “New Dream”
China Mobile officially launched its 4G TD-LTE network today, branded “New Dream.” The New Dream network will launch in 16 cities by the end of the month and 340 cities by the end of 2014. At launch, the carrier will feature smartphones from HTC Corp (TPE:2498), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), LG Electronics Inc. (KRX:066570) (OTCMKTS:LGEAF), Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992), Huawei Technology Co Ltd (SHE:002502), Xiaomi, Oppo, Vivo and Gionee. Noticeably absent was an Apple iPhone announcement (or for that matter Galaxy S4 availability). However, China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941)’s CEO, Li Yue, told the Wall Street Journal, “we hope to offer iPhones on the company’s network soon.”
China Mobile’s expectation for smartphone sales
China Mobile indicated that it expects to sell 220 million smartphones in 2014, up from 155 million in 2013, with 100 million of these being 4G TD-LTE smartphones (i.e., 3G TD-SCDMA smartphones will be down y/y in 2014). According to CNET, China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) is expecting to spend more than the $4.4 billion in subsidies spent in 2013. It is unclear if this subsidy budget would change upon landing the Apple Inc. (NASDAQ:AAPL) iPhone or not, but if not, one can assume a price level likely above China Mobile’s competitors, which makes some sense given the 4G network advantage.
Jabil Circuit, Inc. (NYSE:JBL), one of Apple Inc. (NASDAQ:AAPL)’s suppliers of casings for iPhones, guided for a disappointing February quarter, down approximately 25% sequentially y/y and sequentially in the division that includes its Apple business. Although a 25% sequential decline is in line with March quarter seasonality for Apple Inc. (NASDAQ:AAPL), the y/y decline is a bit hard to understand. Analysts’ best guess, and that of analysts’ contract manufacturing analyst Brian Alexander, is that Jabil was weighted more towards the iPhone 5C vs. the 5S, and that pricing may have been an issue as well. Jabil management was adamant that it was not losing share to Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF). Whatever the case, it does not appear that any material or noticeable order pattern is showing up yet for a China Mobile ramp.
Qualcomm chipsets for Apple iPhone
Analysts at Raymond James note that QUALCOMM, Inc. (NASDAQ:QCOM) in its analyst day indicated that meaningful volumes of chipsets for TD-LTE wouldn’t begin until somewhere around the Chinese New Year (late January/early February), and we still view this as the more likely timing of any Apple iPhone launch on China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941). Announcing availability 5-6 weeks before launch would hurt sales in the meantime, so if the 2 sides can come to an agreement, they expect availability would follow soon after an announcement.
Subsidies issues for Apple and Qualcomm
It is still unclear how much subsidies will be on high end 4G smartphones on China Mobile, and specifically what the pricing of an iPhone may or may not be after subsidies. Clearly, more subsidies would be positive for QUALCOMM, Inc. (NASDAQ:QCOM) and Apple Inc. (NASDAQ:AAPL) if an iPhone were to launch at China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941).
China Mobile’s website is promoting most heavily the HTC One Max, Sony Xperia M35T, Samsung Galaxy Note 2, and Huawei Ascend G716. Analysts believe it is likely three of these four are using Qualcomm Snapdragon processors unless the vendors have designed purpose built versions for China mobile. Additionally, the China Mobile mobile hotspot (mifi) device utilizes a Qualcomm processor.
Opportunity for Apple
Analysta at the firm believe Apple Inc. (NASDAQ:AAPL) sells roughly 5 million iPhones/quarter at China Telecom Corporation Limited (ADR) (NYSE:CHA) (HKG:0728) and China Unicom Limited (ADR) (NYSE:CHU) (HKG:0762), which equates to between a 5-10% share of these networks. It is hard to predict what the pent up demand on China Mobile’s network may be, but ultimately this level of share is likely on China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) as well. Assuming that LTE replaces 3G over a few years, China Mobile will ultimately likely sell 250-300 million LTE devices per year, which would mean broadly 12-30 million iPhones sold/year. Given that it only expects to sell 100 million this year, all else being equal, one would expect 5-10 million iPhones to be sold on China Mobile if it is launched. However, anlaysts suspect the fact that China Mobile has a 4G network advantage and tens of millions of Apple iPhone subs using unlocked phones on the GSM network likely would mean a shipment number far ahead of this in the first year of a launch. They have been using 20 million iPhones as a reasonable first full year estimate, which still looks reasonable.