China Mobile (CHL) and Apple (AAPL) have finally announced a deal by which iPhones will be carried on the world's largest mobile carrier, just in time for Christmas in Cupertino. According to a recent report from Reuters, China Mobile Chairman Xi Guohua had told reporters that there was no announcement and that talks were ongoing. This was in direct contradiction to the Wall Street Journal story earlier this month that predicted an announcement "around December 18." While coming after the estimated date, the deal has been announced, sending both stocks higher on the news. This represents a positive for both, and adds an additional reason to own shares of each.
The Importance of China Mobile
As the largest mobile carrier on the planet with an estimated 759 million subscribers, China Mobile represents a huge opportunity for Apple. A recent estimate by from Morgan Stanley's Kathy Huberty places the number of iPhones that could be sold at 12 million. There are as many guess circulating as there are analysts, but Huberty's numbers are well-researched and she has a track record of putting together solid analysis on Apple. What all this means is that a deal with China Mobile could generate an estimated $3 billion in additional revenue for Cupertino in 2014.
To put some of these figures into perspective, $3 billion would represent 25% of Apple's expected revenue growth for this fiscal year. Additionally, 12 million iPhones is a small dent in the 190 million to 220 million handsets Xi told the press he believes China Mobile will sell next year. That's great news for Apple because it means even after the initial pop, there is still plenty of growth potential for this relationship.
The Real China Mobile News
While largely treated as an afterthought in most of the press coverage, one of the most critical comments made by Xi was that China Mobile will increase the amount it spends on subsidies from the 27 million yuan in 2013. Even as many American carriers are looking to slash subsidies, this incentive is likely to play an important role in the Chinese market as it continues to grow. Affordability of high end smartphones, including the roughly $800 iPhone, is a pivotal issue for handset makers in China.
The 12 million iPhone sales projection above is based on research that figured an addressable market of those respondents who indicated that they were very likely to buy the device, even with the high price tag. This resulted in an addressable market of 195 million potential users able and 'very likely' to buy the device when it becomes available. To the extent that China Mobile decides to lower the price for consumers by offering a subsidy, the addressable market could change dramatically. Within Huberty's research, for example, when 'somewhat likely' respondents (as well as few others) are included, the addressable market swells to 279 million, with her bull case at 23 million in iPhone sales.
The bull case is not a perfect corollary for the inclusion of a subsidy, but it is reasonable to believe that a fair number of 'somewhat likely' consumers would be swayed by a lower net price point. As with all subsidies, the net impact to Apple is quite positive as its margins remain unaffected. China Mobile will also likely benefit from the announcement, both as a company and as a stock.
CHL data by YCharts
Trading the News
China Mobile has been trading in a fairly tight range all year, roughly between $50 per share and $60 per share. Currently trading lower in that range, the Apple announcement should provide the catalyst the stock needs to return to the high end of the range, if not breakout above it. Now that a deal has been announced, I would look for the stock to be strong through year end and into 2014. On Apple, the stock continues to look very attractive, and with the rumblings of added subsidies to the China Mobile platform, the iPhone deal will be significant. Even with an over 3% initial pop, the news has the potential to drive shares above $600; the stock is also a buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.