Apple Inc. (AAPL): China Mobile Opportunity & iPhone 5 Supply

Earlier on Friday, we reported that Apple Inc. (NASDAQ:AAPL) is facing another patent infringement lawsuit from the Internet security company, VirnetX Holding Corporation (NYSEAMEX:VHC).

In other news about the technology giant on Friday, two new research notes came out about the company. This included discussions about  opportunities in China and supplies of the iPhone 5.

Apple Inc. (AAPL): China Mobile Opportunity & iPhone 5 Supply

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Here’s summaries of the notes.

RBC – Apple Inc. (NASDAQ:AAPL) Sizing the China Mobile Opportunity

In its report, RBC quantifies the impact on Apple’s earnings and iPhone 5 units if China Mobile begins supporting the phone.

Apple Inc. (NASDAQ:AAPL) plans to launch iPhone 5 in China this quarter (December quarter) probably with China Unicom and China Telecom. RBC estimates between 10–16 million iPhones could be sold to China Mobile subscribers within the first year of availability. But it faces challenges with subsidy agreements with the carrier.

RBC maintained its “Outperform” rating and $750 price target.

Launch dates haven’t been confirmed but there is an expectation China Mobile will be the 2013 story possibly near the Chinese New Year. But there are concerns with the carrier.

It is the largest mobile operator in the world with 699 million subscribers and 75.6 million 3G customers. Using a 13% iPhone penetration rate with 3G customers, RBC estimates that by including China Mobile, it would add approximately $3 to Apple’s annual earnings per share or $45 to its stock price.

In China, China Mobile is the largest carrier with almost 700 million subscribers (65% share), followed by China Unicom (21%) and China Telecom (14%). Note that China Unicom began selling iPhones in the fourth quarter 2009 while China Telecom just started supporting the iPhone in the first quarter of this year.

For smartphone growth, RBC believes it will sustain a 13% CAGR through 2017. APAC region will add 260 million smartphone units over the next five years with an approximately five times larger unit increase vs. North America. Through 2017, the firm sees an incremental 580 million smartphones being sold with almost one-half (260 million) in APAC.

In response to AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) RBC sees the adoption of the iPhone at these companies should serve as a proxy for penetration rates at China Mobile. Note that AT&T growth has continued through Apple Inc. (NASDAQ:AAPL)’s FY12 with cumulative iPhone units expanding to 63 million, up from 43 million (+48%) during the previous year.

Growth at Verizon has continued with quarterly iPhones increasing to 3.3 million run-rate during Apple Inc. (NASDAQ:AAPL)’s FY13 (up from approximately 2 million in FY12). Now by assuming a similar growth at China Mobile, RBC could see more than 10 million iPhones being sold in the first 12 months of availability as a low-end estimate (an approximate 13% penetration).

Piper Jaffray – iPhone Checks Indicate Improving Supply On Major Carriers

The firm conducted nightly checks of 100 Apple Retail stores to see if the iPhone 5 supply for AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) is improving. It believes that based on trends from Sprint Nextel Corporation (NYSE:S) device checks, it may only be another 2-3 weeks before consistent availability
of AT&T Inc. (NYSE:T) and Verizon iPhone 5s.

Details include iPhone 5 supply picked up for AT&T/Verizon while Sprint Nextel Corporation (NYSE:S) remains stocked.

On Nov. 7, iPhone 5 availability at the the US carriers was above 20% for the first time (Sprint 84%, AT&T 54%, and Verizon 24%). Earlier, Sprint devices had been consistently available for the past eight days while AT&T and Verizon had minimal availability for the past 23 days.

Piper Jaffray is staying with its 45 million unit iPhone estimate for December.

In addition, the firms sees the the pullback in shares as overdone and possible due to a number of factors such as potential changes in margin profile, lack of clarity for the next product cycle, ETF sell-offs, and investors limiting capital gains tax.

At the end of the day, the firm believes Apple Inc. (NASDAQ:AAPL) provides one of the best growth technology stories and trades at an approximate 10 times CY13 EPS multiple.

The firm reiterated its “Overweight rating” and $900 target.