Earlier this month, Apple (AAPL) and China Mobile (CHL) signed the most anticipated deal, the negotiations for which were in the works for a number of years. Under the agreement, the world's biggest carrier, China Mobile, will start offering iPhones on its network from January 17 onwards, which undoubtedly would allow Apple to expand its reach in the world’s biggest mobile market.
The long-awaited deal with China Mobile ensures the availability of iPhones on the three biggest carriers in China. While Apple was already present in China, this deal positions the company in direct competition with Samsung (SSNLF), which currently occupies a large share of the mobile market in China. Apple has been trying to capture market share in emerging markets, where its rival, Samsung, is taking a lead.
Earlier this year in September, Japan's NTT Docomo (DCM) also offered iPhones on its network. In October, iPhones accounted for 74% of total smartphone sales in Japan.
China Mobile will start offering Apple's phones, iPhone 5s and iPhone 5c. The phones offered will be compatible on both 3G and 4G networks. However, the pre-registrations for phones will start from December 25. As of now, pricing and subsidized contract details have not been disclosed. China Mobile stands to learn a lot from the mistakes of China Telecom (CHA), which started offering heavily subsidized iPhones, and reported a 10% decline in net income.
Analysts are expecting China Mobile to increase iPhone sales by 12 million to 23 million units in fiscal year 2014 (FY14). An analyst at Morgan Stanley, Katy Huberty, expects base case sales of 12 million iPhones. She believes that if the base case works out, it would add $2.4 to Apple’s EPS in FY14. In a bull case, she assumes sales of 23 million and an addressable market of 279 million users, adding $5 to Apple's EPS in FY14.
Gene Munster, an analyst at Piper Jaffray, expects 17 million in iPhone sales at an average price of $525. He expects an increase of 5.2% in revenues for Apple.
Toni Sacconaghi, an analyst at Sanford C. Bernstein, sees 15 million iPhone units in sales, adding $9 billion in revenues and $3 billion to the bottom line in the first year.
Xi Guohua, chairman of China Mobile, said that the carrier expects to sell 190 million to 220 million handsets, of which 100 million units will be 4G-compatible. The company plans on expanding 4G outreach to about 340 cities by the end of 2014 compared to 16 cities at the end of 2013.
Bidness Etc believes that the deal will boost sales for Apple by 16 million units in FY14 with an addressable market of 35%, or 267 million users out of total 763 million user base of China Mobile. For an expected average selling price of $560, Apple will have additional revenues of $9 billion and EPS of $3.2 at the end of 2014.
Apple sold approximately 150 million units of iPhones in FY13. The units have a five-year compound annual growth rate of 66%.
Going forward, the deal is a huge win-win for both the mobile carrier and the smartphone maker. China Mobile will continue to ramp up its 4G network, while Apple will be able to enjoy a wider addressable market.
Apple’s stock has yielded year-to-date returns of 6.7% only. Currently the stock is trading at a one-year forward price-to-earnings multiple of 12.3x.
Apple’s share price is 3.5% up in pre-market trading.