Can China Mobile's 4G Platform Deliver For Apple?

| About: Apple Inc. (AAPL)

Summary

China Mobile registered another strong month of 4G customer adds.

China Mobile lost or converted the fewest 3G users in six months.

China could help Apple meet or exceed its high-end March quarter revenue guidance.

China Mobile (NYSE:CHL) added 23.3 million new 4G users in January, which is the second largest 4G growth that it has experienced after last month's 25 million new 4G customers. It now has 335.6 million 4G users, an increase of 214% year over year, which is 40.5% of its 828.5 million users.

China Mobile also experienced its strongest 3G and 4G month-to-month unit growth in 11 months. It added 16.9 million vs. an average of just under 13 million for the past six months and the highest since February 2015's 17.7 million net new customers. It did lose or convert to 4G 6.4 million 3G customers but that is the lowest in the past five months. Its 3G and 4G user base is now 498.5 million or 60% of its 828.5 million users. I have developed a Google Doc with monthly data for China Mobile, China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) available via this link going back to June 2009.

China accounts for the bulk of Apple's revenue growth

China accounted for 23%, 41% and 53% of Apple's (NASDAQ:AAPL) total revenue growth the past three fiscal years, respectively, and 70% of the company's revenue growth in the December quarter year-over-year so keeping an eye on what is happening in China is important to estimating Apple's results.

China has the second highest operating margins

If you need another reason to keep an eye on Apple's China business it is due to its having the second highest operating margin after Japan (41.2% vs. 46.7%) for Apple and it generates the second highest operating margin dollars at $7.6 vs. $10 billion in North America in the December quarter. Tim Cook said that China will become Apple's largest market and if current trends hold up it will be its largest operating profit contributor before it captures the revenue title. For a deep dive into each geography's operating margins this is a note I wrote on them.

This chart from Apple shows the reported and constant currency revenues for its various geographies in the December quarter.

Click to enlarge

China could contribute more than forecast for the March quarter

When I estimate Apple's total March quarter revenue of $51.5 billion, the mid-point of its $50 to $53 billion guidance, by projecting each of its five geographies revenue I come up with negative quarter-to-quarter revenue growth in the March quarter for China. At $16 billion vs. $18.4 billion in the December quarter this would be first quarter-to-quarter revenue decline in China since the March 2011 quarter.

However, if China's three wireless providers - China Mobile, China Telecom and China Unicom - can continue to post strong 4G user growth and Apple gets a revenue kicker from its new China stores, my projection for the March quarter could be on the low side. It may be possible for the company to eke out a sequential revenue increase in China, which would make March quarter's revenue above management's high-end of guidance.

Disclosure: I am/we are long AAPL.

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.

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