Apple to Choose China Mobile - Analyst Blog

Apple Inc. ( AAPL ) will likely choose China Mobile Ltd ( CHL ) as its new telecom partner in China, as per a recent news feed from Bloomberg. Both the companies have started discussions and it will take some time before they strike a deal. Consequently, the iPhone from China Mobile is not expected to hit the market this year.

China Mobile is the world's largest telecom carrier in terms of users, with approximately 667.2 million subscribers as of the end of March 2012. Earlier, China Mobile's incompatible third generation (3G) network prevented it from offering iPhones in China. This incapability also hurt its competitive position against close rivals China Unicom Ltd ( CHU ) and China Telecom Corp ( CHA ), who were already offering iPhones in China.

Currently, China Mobile is considering a transition to the latest fourth generation (4G) wireless network. China Mobile's 4G network is already being tested and is expected to hit nine cities by the end of this year. The transition will not only allow the company to offer iPhone in China but will also boost its sagging market share going forward.

We believe that Apple will benefit equally from the partnership with China Mobile over the long term. Although both China Unicom Ltd and China Telecom Corp offer the iPhone, their subscriber bases are comparatively small, with 209.5 million and 135.8 million, respectively.

Moreover, China Mobile will be the first telecom carrier in mainland China to offer a 4G network. We believe that a partnership with China Mobile will rapidly expand Apple's market share in China.

China is becoming a very important market for Apple. In its latest quarterly report, Apple reported that iPhone sales in Greater China tripled to $7.9 billion (faster growth than any other region), based on the iPhone 4S release and the addition of China Telecom as an iPhone carrier. Apple also stated that it has sold five times as many iPhones in China as it did in the year-ago quarter.

Currently, 3G penetration rate in China is approximately 15.0% of the total mobile subscriber base, which reflects significant growth opportunity, in our view. Apple noted that the growth of the affluent middle class in China bodes well for its products, particularly iPhone. We believe that strong demand for both iPhone and iPad (the latest version yet to launch in China) in China will not only boost Apple's top-line but will also offset sluggish growth in the domestic and European markets.

However, Apple is not the only one to benefit from this significant growth opportunity in China. We believe that Google's ( GOOG ) Android operating system, which commands a market share of approximately 68.4% versus iOS's 5.7%, will continue to provide significant competition to Apple in China. South Korean handset maker Samsung is expected to benefit most from this dominant position of Android in China.

According to a recent report from Gartner, Samsung replaced Apple as the top smartphone seller in the first quarter of 2012 with approximately 26.0% global market share. Samsung also became the top mobile device seller with approximately 20.7% market share, edging past of Nokia ( NOK ). Apple remained #3 with 7.9% market share.

Besides Samsung, we expect Apple to face significant competition from Taiwanese handset maker HTC in China. Despite losing significant market share in recent times, Nokia also has a strong customer base in China, particularly for its low-priced feature phones. We continue to believe that Apple's ability to innovate and grow in China, where the market is more cost-sensitive, will determine the company's fortunes over the long term.

We expect Apple to continue to forge partnerships with local telecom providers in order to increase its penetration in the Asia-Pacific region going forward. The partnerships will help it to provide devices compatible with local 3G and 4G networks, thereby boosting its subscriber base going forward.

We maintain our Outperform recommendation over the long term (6-12 months). Currently, Apple has a Zacks #2 Rank, which implies a Buy rating in the near term.

APPLE INC (AAPL): Free Stock Analysis Report

CHINA MOBLE-ADR (CHL): Free Stock Analysis Report

GOOGLE INC-CL A (GOOG): Free Stock Analysis Report

NOKIA CP-ADR A (NOK): Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos