Last night, China Mobile Ltd. (NYSE:CHL) (HKG:0941) and Apple Inc. (NASDAQ:AAPL) announced a partnership for China Mobile to carry the iPhone.
Pre-orders will begin on Christmas Day on China Mobile’s official website. Apple’s iPhones will be available through both Apple retail stores and through China Mobile Ltd. (NYSE:CHL) (HKG:0941) retail stores starting January 17. Apple Inc. (NASDAQ:AAPL) noted that that the phone will run on 4G/TD-LTE and 3G/TD-SCDMA – in line with consensus views. No pricing data has been announced as of this point but analysts at Barclays believe that the phones will obviously retain a premium price.
Analysts believe this announcement is a relief given concerns after the absence of Apple Inc. (NASDAQ:AAPL) at China Mobile Ltd. (NYSE:CHL) (HKG:0941)’s Global Partnership Conference last week. Based on analysts’ checks, they believe the iPhone is poised for a moderate adoption rate in the near-term and the transaction should be supportive to their estimates for iPhone shipments in C1H14. Analysts believe Apple Inc. (NASDAQ:AAPL) is one of the few companies in our coverage that has the potential to grow within China in 2014.
Comfortable with Recent Checks and a More Gradual Take Rate in China
Given the timing of the announcement, analysts see no benefit to the current quarter but some potential for channel fill in the March and June quarters, in line with prior views. Also, even with a deal now official, they expect a gradual take rate given network limitations – and note that there are already 45 million iPhone users on the China Mobile Ltd. (NYSE:CHL) (HKG:0941) network.
This figure seems to have grown by about 10 million over the last four months, helped by the iPhone 5S and perhaps increased sales of refurbished phones. They believe that the ramp up of 4G will be gradual and iPhone sales may build over multiple quarters. Barclays’ Analysts colleague Anand Ramachandran (who covers China Mobile) believes Apple Inc. (NASDAQ:AAPL)’s total addressable market (TAM) within China Mobile Ltd. (NYSE:CHL) (HKG:0941) could approximate 80 million units.
Given analysts’ checks in the supply chain and having already factored in the revenue guidance for the December quarter, the research firm remain comfortable with analysts’ iPhone forecasts but don’t expect unit upside. For the December quarter, they forecast iPhone unit sales will be 55.0 million.
Analysts estimate a decrease in shipments in fiscal 2Q14, with iPhone units down 21% q/q to 43.2 million – a function of traditional seasonality. They also believe upside is limited since units are likely to be heavily weighted to the 5S, as the 5C is not seeing strong demand at all (been obvious since launch). For full year FY14 we estimate iPhone unit sales will grow 15% y/y to 173.33. The work of analysts’ colleague, Kirk Yang (Asia ex-Japan IT Hardware), backs firm’s estimates – with estimates of CY4Q13 iPhone builds of 54-56 million.
As for iPad, analysts’ estimates account for potential strength from the thinner iPad Air and refreshed iPad Mini with retina display. They estimate total iPad unit sales (combined iPad and Mini) will be up 78% q/q to 25.1 million units for the December quarter. For FY14, they also estimate that Apple Inc. (NASDAQ:AAPL) will grow iPad units 16% y/y to 82.5 million. Analysts note that iPad Mini constraints should last through the March quarter.
Apple’s ability to increase buybacks this spring
Given a lack of unit upside, analysts believe investors’ attention in the near term could turn to gross margin – and in Apple Inc. (NASDAQ:AAPL)’s ability to increase buybacks this spring. Analysts’ estimate for gross margin of 37.2% in the December quarter (up 20bps q/q, recall that this guidance is impacted by a software revenue deferral) could have upside given very favorable product mix. In the March quarter, they estimate another 10bps of expansion sequentially to gross margins of 37.2%, which could also be quite conservative.
Analysts believe the margin upside helps EPS and cash flow, while revenues may lack significant upside until new products hit in 2014. With profitability relatively stable and the balance sheet still strong, they believe the company is well positioned for an expanded stock repurchase program in the spring. On its last earnings call, Apple Inc. (NASDAQ:AAPL) also acknowledged it would review its current authorization in the spring and we believe there is still the potential for upside beyond the current $60 billion authorization.
Apple New Product Catalysts More Likely in 2H14
Analysts continue to believe that Apple Inc. (NASDAQ:AAPL) will launch two larger-screened iPhones in 2HCY14, which could really help its demand in Asia with China Mobile Ltd. (NYSE:CHL) (HKG:0941) and other carriers.
In a similar timeframe, analysts also believe that a 13” iPad makes sense, with a better keyboard accessory. They also believe there is an increased possibility of a wearables strategy emerging at Apple in 2014 and the technology for curved displays may be ready during the year. However, analysts do not see evidence of a TV set yet in Apple Inc. (NASDAQ:AAPL)’s future, although it makes sense for the company to meaningfully update its services capabilities tied to Apple TV and iOS devices in 2014. All told, CY14 seems like a much better year for innovation and new products for Apple Inc. (NASDAQ:AAPL) – but it may be quite 2H loaded.
As a result, they believe near-term share price upside at Apple Inc. (NASDAQ:AAPL) may be driven more on the gross margin side – and in its ability to increase buybacks this spring.