The announcement next week of a major deal between Apple (AAPL) and China Mobile (CHL) is one of the most anticipated and poorly concealed transactions in recent history. This major announcement is all but certain to be revealed on December 18th at China Mobile's 4G Partners conference.
In a comical turn, it appears China Mobile "accidentally" allowed local customers to pre-order the device, register their names and secure a deal for 4G data already. Obviously, this deal has ramifications for the parties involved and appears to be a win-win situation.
For China Mobile this will further boost revenue growth as this deal provides an opportunity to substantially grow data traffic. iPhone users are by far the biggest users of data among smartphone consumers.
We will also have to wait for the details of the agreement, but China Mobile might get a slice of App store revenues which it has been pressing for. We will have to wait for what "concessions" the leading carrier in the world was able to negotiate in this deal.
China Mobile was attractive on a valuation basis prior to this deal. The shares yield a robust 3.7% and they go for ~10x trailing earnings. Revenue growth should clock in at over 20% annually over the next two fiscal years, the company sports a very cash rich balance sheet and the equity is cheap at just over 5x trailing operating cash flow. The stock is a good proxy for investors wanting to play the long-term growth in China.
Obviously this deal will substantially bolster Apple's fortunes in a variety of ways. Analysts are all over the map on how many additional iPhone sales this will impact in 2014. I have seen estimates ranging from 10mm to 30mm incremental iPhone sales. EPS impacts also vary and seem to be in the range of $2 to $4 a share in additional earnings for 2014.
In addition, this transaction was absolutely necessary for Apple to become a major player in the Middle Kingdom where it has fallen out of the top five smartphone manufacturers. This is critical as China is becoming the biggest growth driver for consumer products. Apple needs to win here to remain the best smartphone play in the market.
The 5S has already garnered more than 25,000 "pre-orders" on China Mobile's website in the first 12 hours (about one order every two seconds) even as the deal is not "officially" announced yet. As I previously stated, the deal is one of the worst kept secrets in the market right now.
Even after rising over 40% over the past four months, Apple still has a lot of value here and this deal is likely the next catalyst to power the stock higher. Taking out the company's ~$140B cash hoard, the shares still go for under 9x forward earnings; 60% of the overall market multiple.
Another winner in this deal that analysts are just starting to recognize is Qualcomm (QCOM). Nomura just boosted its price target on Qualcomm to $85 a share from $78 a share previously on the strength of this deal. Nomura cites the positives for Qualcomm by stating "Qualcomm should see a meaningful ramp from TD-LTE devices in the next 1-2 years, in our view. We conservatively estimate that roughly 50mn TD devices would translate into incremental revenues (chipset and royalties) of roughly $800mn-1,000mn and incremental EPS of $0.20-0.25."
Qualcomm is a must hold equity for those that want to play the explosion in mobile growth. It has the patents and chipsets that are helping to power this mobile transition. As China and other developing markets move from a 3G to 4G network environment, it should be a big winner.
The stock is cheap at 13x forward earnings, has a fortress balance sheet (over 10% of market capitalization is net cash) and pays an almost 2% dividend yield. The company also just announced a CEO succession plan, which will remove an overhang on the stock.