Seeking Alpha

BAML: Apple/China Mobile hopes too high

  • "Heightened expectations of significant incremental iPhone units from China Mobile (CHL) are unwarranted and investor/Street expectations are simply too high," says BAML reiterating Apple (AAPL) as a Hold and maintaining estimates for FQ14, but hiking the price target to $600 from $530 on belief the stock will trade at a higher multiple.
  • Noting there are already 30M iPhone users on CM networks, the team sees incremental units of less than 10M vs. Street hopes of 20M-30M or more, and reminds the CM announcement hopes have the stock up 9% over the last two weeks vs. a flat S&P.
  • Both stocks are down 0.4% premarket
Comments (42)
  • Deja Vu
    , contributor
    Comments (1153) | Send Message
     
    The bigger deal is who was more desperate for the deal? CHL or AAPL?

     

    Did AAPl give up volume guarantees? Did AAPl agree to share app store revenues like CHL was demanding? Did AAPL agree to discount the list price of the iPhone?

     

    Because CHL has been pretty consistent in their stand that AAPL was going to have to bend on their inflexibility to get a CHL deal.

     

    If it comes out that AAPL had to give, expect other carriers where AAPL has low teen market share to demand exactly the same terms...
    10 Dec 2013, 08:10 AM Reply Like
  • gensearch2
    , contributor
    Comments (1390) | Send Message
     
    Apple can point out to CM that there are 30 million iPhones on the CM network that Apple has gotten the full subsidy and hasn't forked over a won to CM from the app store. If CM wants to continue to lose market share to the other carriers, Apple can live with that.

     

    Two Russian carriers dropped the iPhone because they didn't like Apple's terms. They came back on board. CM will do the same.
    10 Dec 2013, 08:46 AM Reply Like
  • Deja Vu
    , contributor
    Comments (1153) | Send Message
     
    But then neither did CHL have to fork over a dime in subsidies, nor give AAPL a volume guarantee...(granted in the initial days when the other china carriers got the ipHone back in 2010 or 2011, CHL panicked and offered gift cards etc)
    10 Dec 2013, 08:54 AM Reply Like
  • gensearch2
    , contributor
    Comments (1390) | Send Message
     
    But why should Apple give CM a break on subsidies if Apple is going to get them from someone else. CM knows it's losing market share to the other carriers because they don't carry the iPhone.

     

    Negotiating is a game of convincing the other party that they have more to lose by not signing a deal.

     

    Both parties want to sign a deal. CM wants Apple to sign a deal that's better than anyone else gets. Apple wants a deal on the same terms that everyone else gets.

     

    One of them is going to concede something or they'll walk away. Who stands more to lose by not signing a deal? It doesn't matter what any of us think. The only ones that matter are Apple and CM. Apple makes no attempt to try to manage AAPL share price.

     

    I have no doubt that each of them is trying to convince the other that they have more to lose.
    10 Dec 2013, 09:57 AM Reply Like
  • David RG
    , contributor
    Comments (1034) | Send Message
     
    Don't kid yourself. China Mobile lost share because they use a lousy 3G standard, TD-SCDMA not because they don't have iPhones. They don't have a lot of popular phones. China Telecom, with 100 million 3G subscribers, or 43% market share, is reducing iPhone subsidies.

     

    China Mobile does not need Apple nearly as much as Apple need CM.
    10 Dec 2013, 09:57 AM Reply Like
  • imac007
    , contributor
    Comments (441) | Send Message
     
    A year ago the purported number of iPhones on the network was 10M. Assuming the new number is correct, the increased number is probably partly caused by some existing iPhone owners switching to China Mobile in anticipation of their new network. Also the robust used phone market will have provided some volume. The main point is that these "early adopters" are users more likely to want to upgrade to the 4G China Mobile compatible 5S/5C's. They are not a tapped out market as assumed by the analysts, they represent users already committed to the brand and likely first year converts to new phones. The strong used iPhone market makes upgrading more viable as cost is less a factor for those users compared to first time iPhone purchasers.

     

    China Mobile are a state owned company. This gives Apple leverage they don't have with private companies. Apple bring jobs to the table that benefit the state. Apple indirectly employ more than 1M in China. All Apple has to say is "we WEREN'T thinking about moving jobs elsewhere, but assembling closer to our strong US market makes sense ..." puts jobs on the table. Private companies could care less but China Mobile, as a state owned entity, has to consider that Apple have already brought that to them and that trying to hold access to China Mobile subscribers hostage represents bad faith. The Chinese are attuned to the concept of losing face. Forcing Apple to walk away or lose face is not good tactics because Apple will walk away. That is why no deal was signed before. This is one instance in which state ownership works against the state. The flip side is that the state can tie access to jobs. The governments in North America already tie auto sales to job creation for access to the car market.

     

    Apple do not need China Mobile more than the state needs Apple.
    If the 30M number is correct, Apple are already achieving penetration despite no deal, and it is growing fast. Failing to offer that 30M users compatible iPhones for their network runs the risk of alienating that obviously growing group of users. More leverage to Apple. China Mobile stickiness vs Apple stickiness.
    10 Dec 2013, 11:02 AM Reply Like
  • rrose39
    , contributor
    Comments (645) | Send Message
     
    Apple will not cut CM a special deal. There is no reason to do so.

     

    If CM doesn't want to offer the iPhone, fine.
    10 Dec 2013, 12:41 PM Reply Like
  • flux8
    , contributor
    Comments (582) | Send Message
     
    "I have no doubt that each of them is trying to convince the other that they have more to lose."

     

    Isn't that how most marriages work nowadays?
    :)
    10 Dec 2013, 12:54 PM Reply Like
  • jjkiam
    , contributor
    Comments (331) | Send Message
     
    Your question about the purported number of IPhones on the CHL network has me curious. Just how is anyone able to determine this accurately. I sincerely doubt that 20m more IPhones were sold into the CHL channel last year ! Does anyone know the methodologies employed to arrive at these numbers? Or are they simply some analysts best guesstimates?
    10 Dec 2013, 01:26 PM Reply Like
  • Humble Eagles
    , contributor
    Comments (1327) | Send Message
     
    jj, the way I have heard it was basically guessing in the past. I think they rig the phones to use the talk network, but data is worthless. They get their data from wifi only. If there are 20-30MM iPhones rigged like this on CHL, then I think the numbers I have read are way, way too low! Who wouldn't want a 5C or 5S, soon to have LTE data compared to that setup? And if they can afford a 4S, why do people think they can't afford a 5C or 5S for about the same price?
    10 Dec 2013, 01:35 PM Reply Like
  • Gary Bushwacher
    , contributor
    Comments (508) | Send Message
     
    David, aren't these two statements contradictory ?

     

    "Don't kid yourself. China Mobile lost share because they use a lousy 3G standard, TD-SCDMA not because they don't have iPhones. They don't have a lot of popular phones."

     

    Which is it ?

     

    3G standard, or lousy phones ?

     

    Aren't you arguing against yourself ?
    10 Dec 2013, 02:14 PM Reply Like
  • David RG
    , contributor
    Comments (1034) | Send Message
     
    My comment is that the lack of a more ubiquitous standard like UMTS means that the variety of phones available to China Mobile has severely curtailed their growth. Until Qualcomm added it recently, there were no basebands that could handle TD-SCDMA and the more prevalent 3G modes. This reduced the number of available phone models for CM. CM has much lower 3G shares (around 45%) than total mobile which is over 60%.

     

    As for the iPhone, why would CM be able to sell a higher share of Apple phones than Unicom or Telecom? If those two have 55% of 3G subscriptions, and iPhone shares are currently running at 6%, this implies an 11% share overall with China Mobile addition. Now, 11% of that market is a whole bunch of phones, but this is not the root cause of CM losing share to Unicom or Telecom.
    10 Dec 2013, 03:58 PM Reply Like
  • skibimamex
    , contributor
    Comments (424) | Send Message
     
    those old unlocked GSM phones wont work on the new TDLTE network nor do they support TD-SCDMA so the 30M subs will need to upgrade to new iPhone 5s and 5c's in order to get an acceptable level of data throughput.

     

    CHL will be putting up 250K-400K cell sites to support 4G which will be highly dilutive to its profittabilty until it fills the network with higher ARPU data subs. if you dont think that CHL will desperately need high-end smartphone devices to drive adoption to fill the new network that has the processing power to consume that bandwidth then you really shouldn't even be an investor (either long or short) in this space because ignorance is a poor excuse for a bad investment bet.
    10 Dec 2013, 09:23 PM Reply Like
  • David RG
    , contributor
    Comments (1034) | Send Message
     
    skibimamex,

     

    Again - the iPhone is already available in China and on networks that combined have 55% of 3G subscribers. The 5S and 5C work just fine on Telecom and Unicom, although LTE will be even better. And what is the share. CM is clearly and incremental opportunity but their network and sub base is not superior to the other two carriers, so there is no reason to surmise that share will grow disproportionately.

     

    I remain highly skeptical about the 30million number. Why wouldn't they just switch networks to they could use their iPhone before now??
    10 Dec 2013, 09:47 PM Reply Like
  • Jiaberg-Sydney-OZ
    , contributor
    Comments (156) | Send Message
     
    No matter what, AAPL iPhone models will speak for themselves. In China and Asia, larger screen phones are very popular. I am sure Apple will bring out larger iPhone models in the next few months. This will coincide with the new alliance with CM. CM could see the trend plus the fact that iPhone users tend to be more internet users on their devices too. That alone will ensure CM more amenable to iPhones on their line up. The popularity of iPhone is still strong given the rumoured data for 5S sales in China.
    11 Dec 2013, 03:34 PM Reply Like
  • Humble Eagles
    , contributor
    Comments (1327) | Send Message
     
    >> If those two have 55% of 3G subscriptions, and iPhone shares are currently running at 6%, this implies an 11% share overall with China Mobile addition.<<

     

    Interesting article on this subject today, David. He says they were up to about 11% w/o CHL in Oct, which would lead to much higher numbers (if correct). The comments about price wars are interesting, too.

     

    http://onforb.es/IPY34r
    11 Dec 2013, 03:40 PM Reply Like
  • David RG
    , contributor
    Comments (1034) | Send Message
     
    If these numbers hold, then I would agree. Changes the opportunity to around 20%. Huge difference.
    11 Dec 2013, 04:12 PM Reply Like
  • Humble Eagles
    , contributor
    Comments (1327) | Send Message
     
    I'm a bull, but I don't trust survey based market share data--even when it helps my argument. I did have the same thoughts about competition for iPhone customers causing deal infighting, which would be very bullish for sales. We will see what happens.
    11 Dec 2013, 04:41 PM Reply Like
  • Rjmontealegre
    , contributor
    Comments (133) | Send Message
     
    You can rest assure that both parties got a great deal, that both came out winners, that both yielded where it cost them the least while benefiting the other the most; and that no other carrier will be able to get the same terms, that is, unless they also have 700 million customers.
    15 Dec 2013, 02:51 PM Reply Like
  • Joshua Chin
    , contributor
    Comments (65) | Send Message
     
    Hopefully there is more to the headline than the simplistic justification that there are already 30 Million users on the CHM nextwork. That rational would mean that "because Verizon or AT&T has x amount of current users, the iPhone 5S will not sell well"........Not to mention that all those phones in China were bought a hefty premium. Throw in any sort of subsidy, and the story is different.
    10 Dec 2013, 08:53 AM Reply Like
  • Bill Maurer
    , contributor
    Comments (4602) | Send Message
     
    So I guess BAML read my article this morning? Their note sounds a bit familiar.
    10 Dec 2013, 09:22 AM Reply Like
  • munidave
    , contributor
    Comment (1) | Send Message
     
    That's an Opinion, not a fact.
    10 Dec 2013, 09:25 AM Reply Like
  • Cintos
    , contributor
    Comments (89) | Send Message
     
    Opinion vs Fact. Yes, it is the analyst's job to provide opinions, while Apple and their customer base will supply the facts. How has that been going over the past 10 years????
    10 Dec 2013, 11:34 AM Reply Like
  • skibimamex
    , contributor
    Comments (424) | Send Message
     
    BAML analyst has to have the dumbest logic. Because 30M CHL users already paid hefty premiums to get unlocked GSM phones that can only run on EDGE (i.e. under 256kb) on CHL's legacy 2G network, he thinks these customers will only buy 1 smartphone in their lifetime. What it means there is an installed base of at least 30M that have been indoctrinated to iOS that are dying to upgrade in order to get some decent data capability on the TDLTE network that CHL is now rolling out.

     

    It is highly likely that AAPL has MFN provisions in its contracts so it is precluded from giving CHL a deal without jeopardizing its own existing contracts. And yes CHL is desperate to get higher ARPU data customers as it has lost significant market share to Unicom and ChinaTel on 3G both because CHL was stuck with a non-standard 3G technology and it had limited high-end devices. and yes CHL does do significant subsidizing on higher ARPU post-paid plans. Its pricing structure is more similar to TM-USA with an installment structure in the form of higher monthly service (with higher bundles) and longer term commitments in exchange for lower initial handset prices.
    10 Dec 2013, 09:39 AM Reply Like
  • jjkiam
    , contributor
    Comments (331) | Send Message
     
    Here comes the deluge of negative analysts reports on why this deal is going to mean BAD news for Apple! No incremental sales, reduced margins and subsidies. Yes we are all mistaken the deal with CHL actually just further confirms Apple's inevitable decline!
    The sell the news history in Apple is really pretty amazing and consistent! Look at the analyst responses to the 5s and 5c launch. Or even the new IPad refreshes! Always negative and reluctant to change even when faced with overwhelming historic sales responses. How many argued that the 1st 3 day sales were actually only channel fill. How many argued that Apple would be severely supply constrained. Now you have BAML and Pacific Crest with negative takes. One is that there is no further upside for incremental sales in China and the other that Iphone sales are ACTUALLY weak! Hilarious!!! But consistent!
    10 Dec 2013, 10:24 AM Reply Like
  • www2280
    , contributor
    Comments (506) | Send Message
     
    Pre-order from this Thu, available on Dec18.
    Most iPhone owners there using 4 or 4S.
    10 Dec 2013, 10:31 AM Reply Like
  • Humble Eagles
    , contributor
    Comments (1327) | Send Message
     
    Come on, folks. They downgraded Apple three months ago, losing clients a bundle! One of the reasons for the downgrade? No China Mobile deal! They raised their price target $80. This could just be track covering with mad clients.
    10 Dec 2013, 10:52 AM Reply Like
  • Humble Eagles
    , contributor
    Comments (1327) | Send Message
     
    If I told somebody to sell AAPL because of no CHL deal, I would be trying to minimize impact at this point, especially if I advised clients for a living! Mad, mad clients aren't good for business. CHL is huge! So huge that BAML downgraded AAPL because they didn't have a deal.
    10 Dec 2013, 10:55 AM Reply Like
  • pocohonta
    , contributor
    Comments (543) | Send Message
     
    So if I read this correctly, BAML downgraded Apple but raised price target to $600? They are saying to their clients not to buy Apple stock because its gonna go up. Is that reverse psychology or what?
    10 Dec 2013, 11:48 AM Reply Like
  • Humble Eagles
    , contributor
    Comments (1327) | Send Message
     
    poco, I believe they downgraded back in September after the new phones were rolled out, while dissing the appeal of the new phones and complaining that CHL wasn't announced. Remember how depressed the analysts were until Apple announced the 9 million number? The price target was 520. Today they raised the price target to $600 while saying the verbiage above, but they didn't upgrade it. It is interesting to note that the analysts' depression helped Apple to fall back below $450 intraday a few days after this--if you listened and dumped you gave your shares away to Carl Icahn for less than $450! Like Buffett said, financial prognosticators are here to make weather forecasters look really good! Outside of the Lord, nobody knows what tomorrow will bring!!
    10 Dec 2013, 01:10 PM Reply Like
  • Dre1012
    , contributor
    Comments (47) | Send Message
     
    You have to analysts don't have a clue how to value a stock. They simply look at the price today and guess about the future giving a completely random price target for a period that almost never gets to.
    10 Dec 2013, 07:48 PM Reply Like
  • Keyser Smith Jones Soze
    , contributor
    Comments (97) | Send Message
     
    NTT DoCoMo is the main fuel for strong growth in the near term. CHL provides some of that, but more importantly, CHL is fuel for sustained growth over the next two decades at least, probably longer.
    10 Dec 2013, 11:08 AM Reply Like
  • Humble Eagles
    , contributor
    Comments (1327) | Send Message
     
    Keyser, you make a great point that needs to be emphasized. This isn't about how many iPhones Apple can sell on CHL next qtr. CHL will likely have China wired for LTE in the next few years. Apple will design phones for China if they have to. I personally think the C model is targeted at China, and they will sell a ton over the next two years. They can build them there and pay no shipping, but I also think they can work volume based deals that guarantee Apple millions of phone sales and CHL good prices. Apple, of all companies I know, does a great job managing margins and designing products. They will figure out a way to sell hundreds of millions of phones in China. A CHL announcement is a huge long term positive imho.
    10 Dec 2013, 01:42 PM Reply Like
  • jimwil
    , contributor
    Comment (1) | Send Message
     
    I live in Scotland and wish to buy an IPad Air. I visited the local supermarket who stocks IPads, Air and Minis also the complete Samsong range. They informed me that they are selling 4 times more IPads than the Samsongs. They told me that the IPads are"demonstratingly" better! The Scots are a canny race and so are theChinese.
    10 Dec 2013, 11:12 AM Reply Like
  • thedragonsteamboat
    , contributor
    Comments (2) | Send Message
     
    Analysts are going to provide conservative estimates when it comes to apple. A tough market, competition in the mobile industry and bears surrounding the name makes it easier to be negative or at best incrementally positive about any upside in revenue or earnings. When people talk about sentiment, thats what we see here with the analysts. My take on chl deal. The 30m plus existing iphone users on the network is a positive. The 4g rollout will mean these users would love to upgrade to new phones. Whether that is 10m that do it this year or 30m that do it over the next three years, it's the same number. Of the remaining 630m users, apple can capture their fair share of the market. Let's be conservative and say only 10%. 63m over the next three years (as users switch out of a longer avg term of a contract), that's still 20m plus users a year. Add that to the 10m users a year expected from those already using iPhones, that'll give us a total of 30m a year. Overall penetration will still be about 15%, not unrealistic of apples average market share in developing countries. Plus, if you look at japan and the scenario of pent up demand, we may see initial numbers to be much higher. On a final note, Tim cook was the hired as CEO because of his ability to control operations. For the first time in what seems like a while, apple has caught up with inventory issues and this recent rollout of the iPhone 5s has been a success. The timing of the chl deal is planned and comes at a time when apple and chl is ready for all it's users to take on the newest model of the iPhone. I don't like providing actual estimates, but my opinion is apple will hit on the higher end of that 10-30m estimate of initial users.
    10 Dec 2013, 11:13 AM Reply Like
  • David RG
    , contributor
    Comments (1034) | Send Message
     
    "Overall penetration will still be about 15%"

     

    Apple is in China with 6% market share. Unicom and Telecom have over 50% share of 3G subscribers. Why would the implied share be higher at China Mobile than 10-12%? You think they will do a better job selling iPhones in rural China than the two others have done in more urban areas?
    10 Dec 2013, 12:36 PM Reply Like
  • drmwsunner
    , contributor
    Comments (115) | Send Message
     
    Follow the "yellow brick road." Who are these people, and how does anyone know how much the deal will mean. 700 million subscribers, guess what I'll take the "high" road on this one, and say that this BAML call is a "cheap shot" and sounds more like bashing than intelligent commentary.
    10 Dec 2013, 11:22 AM Reply Like
  • Cintos
    , contributor
    Comments (89) | Send Message
     
    Of course, why would an Apple customer - anywhere - decide his old GSM iPhone is fine, and be disinterested in a new LTE_4G phone. Oh, right, that would be the sentiment of a non-iPhone user. LISTEN to the CUSTOMER!
    10 Dec 2013, 11:27 AM Reply Like
  • StuartKats
    , contributor
    Comments (40) | Send Message
     
    I find analysts' attempt to quantify the value proposition an Apple product misses the mark by a wide margin because the value is in the product's aesthetic which is by definition not measurable. I'm beginning to suspect that it should be the luxury brand analyst that should cover Apple vs. technology.
    10 Dec 2013, 05:50 PM Reply Like
  • jamesmarash
    , contributor
    Comments (10) | Send Message
     
    every analyst I have read ignores the cultural bias of the Chinese people which is an inferior regard for Korea, the people and its products. china regards itself as being on the highest rung of ladder when considering Asian cultures, and there is and always has been antipathy toward regarding others in Asia as equals. Japan occupied Korea for 2 generations, and brutally, and carried with it a racial hatred for the Koreans. that is one of the reasons why apple has 75% of the market in Japan. the Chinese do not hate the Koreans, they just look down on them, considering them of an inferior culture. the Chinese are very status conscious, and there will be a massive shift from the Samsung androids to the iphone for all the reasons listed above, as well as the not so inconsequential superiority of the iphone to anything Samsung has to offer. look for apple to capture the same percentage in china as it did in Japan, and enjoy the ride. I can't wait to see the looks on all these ill educated, narrowly educated analysts when the numbers begin rolling in far in excess than even the most sanguine forecasts.
    11 Dec 2013, 08:07 AM Reply Like
  • Dick6
    , contributor
    Comments (18) | Send Message
     
    Incremental sales of 10 mn is idiotic because the replacement average is 3 years and there are already 30 to 45 million people on the network.

     

    And if you want to master Apple, read all of HUMBLE EAGLES comments, I respect his analysis more than anyone else on SeekingAlpha.
    12 Dec 2013, 03:45 AM Reply Like
  • taosjake
    , contributor
    Comments (10) | Send Message
     
    @jamesmarsh While I appreciate your providing cultural background, your over-generalizations risk misleading through caricature. China, Japan, and Korea are large and complex societies and there are many cross-currents. In China, Korean TV dramas, popular music, and fashion have large followings. My mother-in-law in Beijing once refused to come and visit me in Seoul because she would miss her beloved Korean drama! Similarly, one of my Chinese uncles-in-law hates all Koreans because of Korean gangster wartime behavior in Tianjin, while another reveres them because they assassinated Japanese generals etc. in Shanghai in the 1930s and because Kim Dae Jung was such an effective proponent of democratization. There is much contempt for Koreans out in Chinese cyberspace calling them ”Korean thugs” 高丽棒子 and Koreans are happily to respond in kind "짱게" very roughly "chink scum", but who are the largest group of foreign students in China? Koreans. And the largest group in South Korea? The Chinese. Chinese may be gritting their teeth a bit, but they buy Samsung and LG TVs in huge numbers. I do agree that Apple floats above all competition on a cloud of social prestige, but to be fair Samsung does have its fans. And Japanese-Korean relations are equally complex and full of paradoxes. Just some observations by an American who has been observing the scene for several decades. . . .
    12 Dec 2013, 05:31 AM Reply Like
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