China Mobile's guidance for 2006 capex bodes well for Ericsson, its primary supplier of GSM equipment, as well as Nokia and Motorola with approximately 32% and 15% of the handset market respectively. Lehman Brothers analyst Tim Luke explains in a note to clients:
For Ericsson, in particular, the Asia Pacific region represented 21% of revenue in 2005, with China accounting for 44% of regional revenue or 8% of total revenue. For 2006, we forecast 10% growth in Ericsson's APAC revenue. Given China Mobile's 16.5% forecast growth in capex, we see the possibility of upside to our Ericsson APAC revenue forecast.
In addition, strong subscriber growth in China benefits Nokia and Motorola from a handset unit perspective. 2006 subscriber growth has started strongly, driven by a slight shift in the New Year holiday selling season into January, although sales since the holiday have been muted. China Mobile highlighted the Nokia 1100/1110 and Motorola C139 handsets, as well as one each from Ningbo Bird and Amoi.
Given the likelihood of strong growth accelerating in the rural areas of China and other emerging markets, we expect shipments of low-end phones to steadily increase, which is likely to lead to ASPs and margins remaining under pressure. For Nokia, we expect some benefit from the recent launch of the new 1110 and 1600 low-end phones, which are based on a cheaper product platform than the 2-year old 1100, but a shift to materially cheaper single chip GSM platforms does not seem likely until later in 2006.