Apple Inc. China Mobile Deal Could Help Margins, Says RBC

RBC Capital Markets, LLC Amit Daryanani, CFA (Analyst) Mark Sue (Analyst), Mitch Steves (Associate) Karl Ackerman, CFA (Associate) on the new Apple Inc. (NASDAQ:AAPL) and CHL news.

China Mobile to Join Apple Carrier List

Apple Inc. (NASDAQ:AAPL) and China Mobile Ltd. (NYSE:CHL) (HKG:0941) announced that they have entered into a multi-year agreement to add the iPhone to China Mobile’s carrier network. The iPhone 5s and iPhone 5c will be available from China Mobile beginning Friday, January 17, 2014.

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Key points:

All You Need to Know: As of November, China Mobile Ltd. (NYSE:CHL) (HKG:0941) serves 181M 3G customers (763M total subscribers) and the Apple Inc. (NASDAQ:AAPL) and China Mobile deal opens a large subscriber base for the iPhone product line (5s/5c). We believe this could add $10B/$3.00 to Apple’s annual financial model over the NTM period. Notably, the addition should materially impact Apple Inc. (NASDAQ:AAPL)’s Mar-qtr as Chinese new year sales should be bolstered by the increased demand and market opportunity. Given the increased March opportunity from the China Mobile deal, concerns surrounding Mar-qtr guide should decrease. Maintain Outperform and $590 price target.

China Mobile

The company is the largest mobile network operator in the world, with 763M subscribers as of November 30 and 181M 3G customers. We estimate China Mobile could add 17M+ 3G subscribers over the next twelve months which represents a ~10% penetration rate. In this scenario, we estimate that the addition of China Mobile could add ~$9-10B to Apple Inc. (NASDAQ:AAPL)’s annual revenue line and $3.00 to EPS. This is based on ~17M unit sales, a conservative $560 ASP and 30% operating margins.

The Largest Chinese Carrier

For comparative purposes, China Unicom (Hong Kong) Limited (NYSE:CHU) and China Telecom Corporation Limited (NYSE:CHA) (HKG:0728) combine for 454M subscribers and 208M 3G customers. In our view, the 3G market is most significant and the addition of China Mobile Ltd. (NYSE:CHL) (HKG:0941) represents a material positive (equivalent to increasing its China Market by ~1.9x). Notably, total 3G subscriber growth continues with the Sept quarter seeing total China 3G sequential unit growth of 16%.

Financial Impact

The two biggest drivers to EPS from the addition of China Mobile Ltd. (NYSE:CHL) (HKG:0941) are the long-term margin profile of the phones and the penetration rate at the carrier. We believe Apple Inc. (NASDAQ:AAPL) could generate incremental EPS in a range of $2.50-$3.50 for the first full twelve months with China Mobile. Given the lower tax rate from international profit, roughly 2%, we believe gross margins should impact NTM EPS the most.