Imminent China Mobile Deal Could Add $45 Billion To Apple's Value

| About: Apple Inc. (AAPL)

China Mobile (NYSE:CHL) seems set to launch the iPhone in China with pre-orders expected to start Thursday, according to a new Wall Street Journal report. [1] The carrier’s Shanghai website recently carried an advertisement for its about-to-be-launched 4G LTE network, which invited subscribers to pre-order the iPhone 5s alongside other smartphones from Samsung and Sony. The ad has since been pulled down but the WSJ confirmed the news by calling up a China Mobile customer representative, who said that the pre-orders could be placed online as well as made through some dedicated branches in Shanghai.

Given that the carrier is planning to launch 4G on December 18th, and that the new iPhones have already received regulatory approval to run on China Mobile’s network, a deal between the two seems imminent. China Mobile has been aggressively investing in its 4G network, and welcoming the new network with the iPhone should help it recoup its costs faster and wrest back some of the market share advantage it has lost to rivals in recent years.

As for Apple (NASDAQ:AAPL), a deal with China Mobile opens up a huge subscriber base of 750 million that has largely remained untapped in the absence of iPhone subsidies. Currently, Apple has subsidy arrangements with China Unicom and China Telecom, which together account for only about 35% of the Chinese subscriber base. With the smartphone market in developed countries increasingly getting saturated, China Mobile will give Apple greater reach in an emerging market that has already leapfrogged the U.S. as the largest smartphone market in the world, and yet has a lot of steam left due to its low 3G penetration. China Mobile currently has only about 23% of its total subscriber base on 3G.

What also makes China Mobile more lucrative from Apple’s point of view is its relatively more affluent subscriber base. Despite lagging in 3G subscriber mix, China Mobile has a mobile ARPU that exceeds the other two carriers’ by $3, or about 45%. Given Apple’s premium price point and the general lack of upfront subsidies in China, we expect the iPhone to be more successful on China Mobile than it has been on the other two carriers so far. However, it will be interesting to see if Apple sets an unlikely precedent by offering a concession either in subsidies or any other form to mitigate China Mobile’s subsidy concerns.

$45 Billion Opportunity

In order to gauge the sales opportunity for Apple, we look at the available usage data for the iPhone on China Mobile’s network. China Mobile had around 10 million iPhone users in October 2011, and in the next four months, it added another 5 million, implying an addition of almost 1.25 million iPhone users to its network each month. For the four months prior to October 2011, China Mobile had added the same number of iPhone users on average. Although we don’t have data for the subsequent months, we can conservatively assume the rate of adoption of unsubsidized grey-market iPhones on China Mobile’s network to have remained fairly constant in the past year. This could mean that there are about 40 million iPhone users on China Mobile’s network currently.

If, as expected, China Mobile launches the iPhone to coincide with the unveiling of its 4G network next week and starts off by selling an additional 1.5 million iPhones every month, the carrier could end up with about 20 million additional iPhone activations in 2014.

Going forward, it could sell around 30 million additional iPhones in 2015 at a little higher than the 2014 rate. To arrive at the long-term average sales, we look at AT&T’s percentage of iPhone activations to total retail subscriber base for 2012. AT&T had about 21.3 million iPhone activations in 2012, and it ended the year with more than 77.8 million subscribers, taking the percentage close to 27% in about five years for which it had the iPhone.

If China Mobile were to reach this percentage by 2020, it could be selling close to 200 million additional iPhones a few years out. In our analysis, we are taking a more conservative estimate of 100 million additional iPhones by 2020 considering the more competitive dynamics at the lower end in China. Additionally, accounting for the greater appetite for lower-priced iPhones among the Chinese and the potential margin hit of a China Mobile deal, we assume the iPhone average pricing to decline from about $600 currently to $350 and margins from about 47% currently to less than 27% by the end of our forecast period (2020).

This would add an upside of about 20% to our long-term revenue forecast, or about $27 billion, and about $4 billion to our EBITDA in the outer years of our forecast period. We estimate that this could increase Apple’s value by $45 billion and take our price estimate to $650, an upside of about 10% on our current $600 price estimate. You can move the iPhone pricing trend line in the chart below to make your own forecast for Apple’s value.

Our assumptions are contingent on China Mobile actually leading the 3G race in the same way as it has dominated 2G. However, if China Mobile is unable to leverage its affluent subscriber base and the huge market share lead in 2G and turn it into a 3G/4G advantage, the scenario may not play out as described above. Having China Unicom and China Telecom in the bag may help Apple cover a bit of lost opportunity in China Mobile, but for the China story to play out, its largest wireless carrier must deliver.


  1. China Mobile to Accept iPhone Orders This Week, WSJ, December 9th, 2013

Disclosure: No positions