Apple And China Mobile: It Begins

Includes: AAPL, CHL
by: Bret Jensen

Well, after a long wait, today is the day that Apple (NASDAQ:AAPL) finally gets to see its iPhone selling via the largest telecom carrier in the world; China Mobile (NYSE:CHL). This gives the giant from Cupertino access to China Mobile's ~763mm subscribers and the partnership is a critical to Apple's ability to penetrate the largest consumer market in the world. The shares might have a "Buy the rumor, sell the news" moment in trading today, but long term this is a positive for both companies & stocks.

Obviously for Apple, this should boost sales and market share in the Middle Kingdom where it has struggled to gain a foothold. The company was already making some progress in China as it recently reported record revenues there.

Estimates are all over the map on how many additional iPhone sales this means for 2014. I have seen estimates range from a few million to 30mm. Looks like the pre-orders for the new phones were 1.2mm prior to launch. This bodes well for at least a 10mm to 20mm yearend figure with the possibility of even higher sales in my opinion.

I have also seen comments around "cannibalization" of sales from other carriers in China. I don't put much weight on these worries. Early returns from the recent deal with NTT Docomo (NYSE:DCM) show carriers are indeed offering better subsidized deals to their subscribers rather than lose them to other Telecom players. However, this does not cost Apple anything and actually boosts demand overall. I believe the same will eventually occur in China.

Analysts' estimates for how much China Mobile will contribute to the bottom line also have wide discrepancies but generally fall into the $2 to $4 a share in EPS range. Investors should get some idea on how powerful the earnings/revenue growth story is when the company reports earnings later this month. Look for comments on early returns from the deal in China in the earnings conference call as well from how NTT Docomo has boosted company's performance in Japan.

In the meantime, Apple looks undervalued here. The overall market is selling at ~15x forward earnings on an expected 4% rise in revenues for S&P 500 companies (Which would be double 2013's anemic 2% increase in sales). AAPL sells for just over 11x forward earnings on an 8% rise (double the expected increase for the market) in revenues expected in 2014.

Taking out is over ~$140B cash hoard and the equity sells for just 8x forward earnings. China Mobile should start to contribute to the bottom line in the following quarter. In meantime, shares yield 2.3% and the company is returning some $8B to $10B a quarter to shareholders via dividends and stock repurchases.

As for China Mobile, I do own the shares in my income portfolio. It should get some benefit from the deal from Apple which will expand its offerings to its subscribers. The deal should also help the carrier grow data traffic & revenues there as Apple users consume more bandwidth by a large margin than any other consumer.

However, I think you own China Mobile for two reasons. First it yields a juicy 3.9% dividend. More importantly it is a good proxy for the overall Chinese market especially as political leadership tries to move the country to an economy more focused on consumer spending. I also trust its accounting, which is a concern for a good deal of other Chinese equities. S&P has a $59 a share price target on the shares and the company has a very solid balance sheet.

Disclosure: I am long AAPL, CHL. 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.