Brian White on Apple Inc. (NASDAQ:AAPL) and China Mobile deal
Summary: Sunday evening, Apple and China Mobile finally tied the knot with a multi-year agreement announced. This long-awaited agreement includes Apple’s new iPhones that will be available on the China Mobile 4G & 3G networks on January 17, 2014. In our view, this agreement is well timed for the Chinese New Year that begins on January 31, 2014, the year of the “horse”. In our view, this has been the most difficult carrier agreement for Apple to negotiate in its history; however, we believe the opportunity for the iPhone to expand its reach within China Mobile’s wireless subscriber base will prove to be well worth the wait.
With 763 Million Wireless Subs, China Mobile was Worth the Wait. Given the size of China Mobile with 763.3 million mobile subscribers in November (181.1 million 3G subscribers), or 62% of the total 1.23 billion wireless subscribers in China, we believe Apple had to negotiate hard on this agreement and is the reason we believe this deal has taken so long to consummate.
The iPhone Already has a Strong Following at China Mobile. Despite not having an official agreement with China Mobile before Sunday night’s announcement, we estimate there are 35-40 million iPhone users on the network at China Mobile. Our visits to China Mobile branches, resellers and an Apple Retail Store this weekend in China highlighted that China Mobile is offering the iPhone 5S (and iPhone 5C) to customers; however, the new iPhones are only available on the 2.5G/2G network, but this will clearly change given Sunday night’s announcement.
China Mobile Ltd. (NYSE:CHL) (HKG:941) and Apple Inc. (NASDAQ:AAPL) iPhone sales
We Expect 20-24 million iPhone Sales to China Mobile in 2014. Given the entrenched iPhone population already on the China Mobile network that are candidates for iPhone upgrades, combined with an opportunity for China Mobile to attract new iPhone users with its 763 million wireless subscriber base, we believe Apple is well positioned to increase its market share at the carrier in 2014. We believe Apple can sell 20-24 million iPhones to China Mobile in calendar year 2014 with an EPS impact of approximately $4.00, at the mid-point of our forecast.
Valuation: Our $777 price target is based on nearly 14x our CY:14 pro forma EPS estimate (adjusted for interest income/expense), plus Apple Inc. (NASDAQ:AAPL)’s net cash per share of $142.77.