Apple Inc. (AAPL), China Mobile’s iPad Launch To Follow iPhone Debut


Apple Inc. (NASDAQ:AAPL) appears close to finalizing a deal to sell the iPhone through China Mobile. Analysts at Deutsche Bank update their EPS sensitivity model to determine the impact of the deal and their base case assumption of 20M additional units yields ~$4 of incremental EPS in year 1. The research firm recently raised their PT to $625 (10x EV/FCF) and the China Mobile news should help alleviate concerns on Apple Inc. (NASDAQ:AAPL) around a material 1H14 iPhone slowdown following what analysts expect to be a robust C4Q13. Apple remains cheap at 9x EV/FCF and they expect a re-rating of Apple Inc. (NASDAQ:AAPL) shares through multiple catalysts including larger screen iPhones & iPads, carrier expansion and new product segments (wearables, TV etc). The firm maintains ‘Buy’ and $625 PT.

Apple-China Mobile deal

Analysts expect China Mobile to end with ~740M total subs in CY13 and ~135M 3G subscribers. They expect China Mobile subs to grow ~20% Y/Y to ~830M in CY14 (with ~160M 3G subs). As outlined in prior research, China Mobile represents a significant, largely untapped market opportunity. To put its’ size in perspective, AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) have ~230M subscribers combined. In addition, 20M incremental iPhone sales represents only 12% of China Mobile’s 3G subs, or 2% of total subs.

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$4 of incremental EPS

Report says, 20 million Apple Inc. (NASDAQ:AAPL)’s iPhones at an ASP of $525 and a blended contribution margin of 50% coupled with 5% incremental Opex and 26% tax rate yields ~$4 in incremental EPS. Put another way, analysts estimate each 1M iPhones sold into China Mobile represents approximately $0.20 of EPS. They outline the sensitivity analysis of units and contribution margin in Fig 1 below.

Report also noted that an iPad launch via China Mobile would be a “logical next step” for Apple Inc. (NASDAQ:AAPL) after the iPhone deal is inked.

Apple EPS

Deutsche Bank Reiterate Buy and $625 PT

Research firm’s model remains unchanged. Their $625 PT is based on ~10x CY14E EV/FCF; the lower end of its historical 7-29x range. Firm view the multiple as appropriate given Apple Inc. (NASDAQ:AAPL)’s growth/profit profile. Risks include product execution, ASP declines & phone / tablet comp’n.