Increasing Investment In China Can Help Expand Intel's Mobile Presence

| About: Intel Corporation (INTC)

In an effort to increase its presence in China, Intel (NASDAQ:INTC) recently announced the establishment of an Intel Smart Device Innovation Center in Shenzhen and a $100 million Intel Capital China Smart Device Innovation Fund. These initiatives aim to accelerate the delivery of Intel technology-based devices to the China market and beyond, and are focused on the development of devices, including two-in-ones, tablets, smartphones, wearables, and the Internet of Things among other technologies.

With a focus on delivering leadership products and technologies, Intel is committed to deliver on its promise that 'if it computes, it does it best with Intel products'. To leverage growth in China, the company plans to build upon its nearly 30-year history in the country, accelerating new innovations and reshaping the computing industry. Since 1998, Intel Capital has invested more than US$670 million in 110 companies in China, across two already-established investment funds.

The issuance of 4G licenses, promotion of the Broadband China project, and popularization of HD video provide significant growth opportunities in the region. In this article, we discuss why the increasing investment in China can help expand Intel's presence in the mobile computing market.

Our current price of $27 for Intel is in line with the current market price.

China Is The Largest Smartphone Market; Tablets Have Yet To Take Off

In Q1 2014, 449 million mobile phones (feature & smartphones) were sold, 3.9% higher compared to Q1 2013. Smartphones accounted for 62.7% of total mobile shipments in the quarter, with 40% of the demand coming from China.

With more than 500 million smartphone users, China is the world's largest smartphone market. Rising demand for low-cost phones is one of the key factors driving strong mobile sales in the region. According to ABI Research, smartphones with a price point of $250 and below (before carrier subsidies) will account for 46% of global smartphone shipments by 2018 compared to 28% in 2012. Much of the low-cost smartphone growth is being driven by rising demand from emerging economies with China leading the pack, so far.

The Chinese government recently issued 4G licenses to its telecom providers - China Mobile (NYSE:CHL), China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU) - in the TD-LTE network. Only a handful of countries besides China has adopted this standard for its 4G, and the same is expected to increase demand for LTE-enabled smartphones in China this year.

While the Chinese smartphone market has been growing for a long time, the tablet market in the region hasn't quite taken off yet. The Chinese tablet market (in terms of sales) is forecast to grow 50-60% in 2014, and is expected to continue expanding at a strong pace for the next few years.

With New Product Intel Can Gain Share In The Market

Intel was a late entrant in the booming smartphones and tablet market, but with considerable investment and effort has managed to expand its presence in this segment. It presently accounts for 4% - 5% of the global tablet market, and its share in smartphones is less than 1%. We believe that expanding its presence in China can help the company increase its global share in the mobile market.

New products/ developments that can help Intel tap China's growing smartphone and tablet market -

- First LTE solution (XMM 7260): Intel's XMM 7260 meets the five-mode requirement of China Mobile, including support for TD-LTE, and TD-SCDMA protocols required in China. The company is awaiting the certification of the Intel XMM 7260 in China. The new chips target the performance and mainstream device market segments, and are expected to be commercially available in the second half of 2014.

- SoFIA family of integrated mobile SoCs: The SoFIA is Intel's first integrated mobile solution. It targets the entry and value smartphones and tablets, the fastest growing mobile sub-segments in the region. Intel's SoFIA 3G platform is on track to ship to OEMs in the fourth quarter of 2014.

- Offering subsidies to tablet manufacturers: Intel is offering to heavily subsidize manufacturers' costs to include its components in their future tablets, a move that impacts its bottom line but could help it sell more chips. Intel is paying tablet makers to cover the additional component costs of using its Bay Trail chips instead of ARM-based processors, and is also helping its customers cover the engineering costs of designing an Intel tablet. With contra revenue, Intel is paying tablet makers to cover the additional bill of materials (BOM) costs.

The company believes that it will no longer have to pay the subsidies when its new products hit the market towards the end of 2014. The bill of materials cost for a Broxton tablet will be $20 less than for Bay Trail, and SoFIA, with its greater integration and smaller die size, is expected to cost even less. While Bay Trail was designed for the high end of the tablet market, Intel's new platforms target systems below $250. It targets to ship 40 million tablet chips in 2014, compared to 10 million in 2013.

The Mobile & Communications segment accounts for less than 3% of Intel's overall revenue and thus does not have a significant impact on its valuation, in our view. Moreover, the company continues to earn negative operating profit from the division and we believe will continue to do so in the near future as well. Nevertheless, Intel's investment and presence in the smartphone and tablet market is important for the company to retain its relevance and dominance in computing.

Disclosure: No positions