In a new report to clients, Brian J. White, CFA of Cantor Fitzgerald talks about China Mobile Ltd. (NYSE:CHL) (HKG:941) and Apple Inc. (NASDAQ:AAPL)’s new deal.
Below is the executive summary from ‘Apple’s Relationship with China Mobile Kicks Off – “We’ve Only Just Begun”.
China Mobile Ltd. (NYSE:CHL) (HKG:941) and Apple Inc. (NASDAQ:AAPL)
Summary: China Mobile officially began selling Apple’s iPhone in China as part of an agreement that was announced in the later part of December. Our initial checks indicate Apple and China Mobile have prepared very well for this launch with nearly all the stores we researched holding sufficient stock of all models, even gold iPhones. Although we believe much scrutiny will take place around near-term data points associated with this agreement, we remind investors that Apple’s relationship with China Mobile has only just begun.
Significant Opportunity Awaits Apple, and “We’ve Only Just Begun.” In our view, the opportunity for Apple with China Mobile is significant and the relationship has only just begun, providing investors with a new, long-term growth vector to look forward to in the coming years. As the largest carrier on the planet, China Mobile exited November with 763.3 million mobile subscribers, or 62% of the total wireless subscribers in China. We believe Apple has courted China Mobile for years, and we believe this marriage will prove worth the wait. We estimate Apple can sell 20-24 million iPhones to China Mobile in 2014.
In Our View, A Big iPhone Upgrade Cycle Awaits Apple. Through the strength of Apple’s iconic brand and status symbol of the iPhone in China, we estimate there are already 35-40 million iPhone users on the network at China Mobile. Interesting enough, these iPhone users have been suffering through 2G/2.5G service to use the iPhone on China Mobile’s network; however, this can now change with Apple’s official agreement with China Mobile that supports both 3G and 4G capabilities. Looking beyond the 4-inch iPhone 5s and iPhone 5c, we expect Apple to launch larger iPhones in 2014, including a 4.7-inch and 5.5-inch iPhone that we believe will prove popular in China. Based on our checks, pricing for the iPhone with China Mobile is higher than its competitors in China. For example, without a contract, iPhone pricing is as follows: CNY5,488 (~$907) for 16GB, CNY6,288 (~$1,039) for 32GB, and CNY7,088 ($1,172) for 64GB. China carriers subsidize very differently than carriers in the U.S. For example, for a 24-month contract without any upfront payment but with a specific data plan, the monthly payment for a 16GB iPhone 5s under China Mobile would be CNY229 (~$38).
Valuation: Our $777 price target is based on nearly 14x our CY:14 pro forma EPS estimate (adjusted for interest income/expense), plus Apple’s net cash per share of $142.77.
