Apple: What Would Affect iPhone Shipments To China Mobile?

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Apple Inc. (NASDAQ:AAPL) signed the long-awaited deal with China Mobile Ltd. (NYSE:CHL) (HKG:941) on December 22. The world’s largest telecom operator will start taking pre-orders from December 25, and the iPhones will go on sale on China Mobile on January 17. Goldman Sachs analyst Bill Shope said in a research note to investors that the subsidy levels will determine the actual volume potential. However, Apple Inc. (NASDAQ:AAPL) said that subsidy levels and pricing will be announced at a later date. Apple Inc. (NASDAQ:AAPL) is the fifth largest smartphone vendor in China.

Goldman Sachs estimates that the deal can improve Apple Inc. (NASDAQ:AAPL)’s 2014 EPS by at least 5%. Mr. Shope expects China Mobile Ltd. (NYSE:CHL) (HKG:941) to sell 15-20 million iPhones through 2014. The iPhones won’t initially be available to all of China Mobile Ltd. (NYSE:CHL) (HKG:941)’s customers. The company has started rolling out its 4G TD-LTE network. China Mobile Ltd. (NYSE:CHL) (HKG:941) will offer 4G services in 14 cities by the end of 2013, and to 340 cities by the end of 2014. The launch date of January 17 indicates that Apple Inc (NASDAQ:AAPL) might not have included China Mobile Ltd. (NYSE:CHL) (HKG:941) sales in its stronger than expected December quarter estimates. Moreover, the seasonally weak March quarter will see strong sales as China Mobile Ltd. (NYSE:CHL) (HKG:941) customers buy iPhones.

iPhone drives Apple’s overall revenue growth

Apple Inc. (NASDAQ:AAPL) has enjoyed stupendous success in China since it first signed the iPhone deal with China Unicom in 2009. China Telecom began offering the iPhones in 2012. The iPhone sales in China have helped boost sales of MacBooks and iPads, helping Apple Inc. (NASDAQ:AAPL)’s overall revenue growth.

Apple iPhone

The Cupertino-based company shipped 23.4 million iPhones to the world’s most populous country over the last four quarters. It indicates that about 12% of China Unicom and China Telecom’s new 3G subscribers purchased an iPhone in the same period. After the deal with China Mobile Ltd. (NYSE:CHL) (HKG:941), Apple Inc. (NASDAQ:AAPL) has increased the number of addressable target market of 3G subscribers by a whopping 81%. China Telecom and China Unicom have a combined 3G user base of about 200 million. Add China Mobile Ltd. (NYSE:CHL) (HKG:941) to that, and the figure surpasses 360 million.

Apple China Mobile

Apple iPhone sales to top three Chinese carriers

Goldman Sachs says that the iPhone shipments to China could reach 42.5 million in 2014, even if there is no additional growth at China Unicom and China Telecom. It means China Mobile Ltd. (NYSE:CHL) (HKG:941) can sell about 19 million units. Let’s look at it this way. The iPhones accounted for 12% of China Unicom and China Telecom’s combined 3G user base over the past year.

Apple China

Applying the same 12% ratio to China Mobile Ltd. (NYSE:CHL) (HKG:941)’s 170 million 3G subscribers, the iPhone shipments to the world’s largest telecom operator could reach 20.5 million units. This calculation doesn’t assume any growth in China Mobile Ltd. (NYSE:CHL) (HKG:941)’s 3G subscriber base through 2014. Moreover, the company already has about 45 million iPhone users who use 2G technology because those iPhones don’t support China Mobile Ltd. (NYSE:CHL) (HKG:941)’s proprietary 3G TD-SCDMA technology. Some of them may upgrade their devices, further increasing the iPhone sales.

However, subsidy and pricing could affect the iPhone shipments to China Mobile Ltd. (NYSE:CHL) (HKG:941). If the Chinese telecom operator’s subsidy levels are less aggressive than its two other counterparts, or if pre-paid users, who account for one-third of China Mobile Ltd. (NYSE:CHL) (HKG:941)’s 3G subscriber base, shun paying upward of $800 for an unsubsidized iPhone, the shipments could be affected by as much as 25-30%. That will broaden the expected iPhone sales range from 19-20 million to 15-20 million in 2014.

Apple Subsidy

Apple Inc. (NASDAQ:AAPL) shares were down 0.15% to $569.25 on Tuesday.

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