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Apple Inc. (AAPL) iPhone Subsidies From China Mobile To Be Limited

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There have long been speculations about Apple Inc. (NASDAQ:AAPL)’s potential deal with the world’s largest telecom carrier. Reuters suggested that China Mobile Ltd. (NYSE:CHL) (HKG:0941) may go ahead and announce the deal between November 9th and 11th. China Mobile Ltd. (NYSE:CHL) (HKG:0941) has put up an ad on its website for a faster 4G network.

Apple Inc. (AAPL) iPhone Subsidies From China Mobile To Be Limited

Apple-China Mobile deal to result in 10M annual iPhone sales

UBS Research analysts Steven Milunovich and Peter Christiansen said in a research note to investors that China Mobile Ltd. (NYSE:CHL) (HKG:0941)’s subsidy budget may not be as large as many expect. The UBS team in China said that a 16GB free device with monthly commitment of $45 for two years (total $1,080) is the most popular iPhone contract in the country. However, a few days ago, China Unicom and China Telecom raised their monthly fee for the iPhone 5S to $60. UBS analysts estimate that Chinese carriers subsidize about 40% to 50% of the iPhone cost or about $550 per device.

The analysts estimate that China Mobile Ltd. (NYSE:CHL) (HKG:0941) will allot 27 billion yuan ($4 billion) for handset subsidies in 2013, and increase it to 35 billion yuan ($5.2 billion) next year. If 20-30% of the largest Chinese telecom operator goes to Apple Inc. (NASDAQ:AAPL)’s smartphones, it will amount to 2-5 million iPhones. Though subsidies are limited, a deal with China Mobile Ltd. (NYSE:CHL) (HKG:0941) could translate into over 10 million iPhone unit sales annually. That’s because more than 70% of China’s high-end subscribers are customers of China Mobile Ltd. (NYSE:CHL) (HKG:0941).

Apple’s brand power to attract China Mobile subscribers

As of 2012, there were 25 million iPhone users on China Mobile Ltd. (NYSE:CHL) (HKG:0941)’s GSM network without a tie-up with Apple Inc. (NASDAQ:AAPL). Once the two companies join hands, Apple Inc. (NASDAQ:AAPL)’s brand power can easily attract a large number of customers. Apple’s recent success in Japan indicates that the company can witness similar growth in China as well after signing a deal with China Mobile Ltd. (NYSE:CHL) (HKG:0941). Apple’s revenues from Japan surged 41% in the latest quarter driven by its deal with NTT Docomo Inc (NYSE:DCM) (TYO:9437), the largest telecom operator in Japan.

However, Apple Inc. (NASDAQ:AAPL)’s not-so-encouraging fourth quarter results prompted UBS analysts to lower their earnings estimate for the company. For FY14, analysts expect Apple Inc. (NASDAQ:AAPL)’s EPS to decline 2% to $43.63 from $44.45. UBS has a Neutral rating on the stock with $540 price target.

Apple Inc. (NASDAQ:AAPL) shares were almost unchanged at $525.74 in pre-market trading.

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