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Sarfaraz A. Khan
Sarfaraz A. Khan
Articles (62)  | Author's Website |

China Mobile Will Be the Biggest Beneficiary of the Changing Market Dynamics

December 07, 2013 | About:

Last week, Wall Street Journal, citing an unknown source, revealed that Apple (NASDAQ:AAPL) has finally signed its landmark deal with the world’s biggest telco China Mobile (NYSE:CHL) which would give Apple access to hundreds of millions of additional customers. Neither Apple, norChina Mobile has officially confirmed the deal. This comesafter China’s Ministry of Industry and Information Technology gave permission to China Mobile, China Unicom (NYSE:CHU)and China Telecom (NYSE:CHA) to operate LTE/fourth generation digital mobile telecommunications (TD-LTE) business. With these developments, China Mobile looks all set to launch its commercial 4G services in China on December 18 under the brand name “He”. However, rumors abound that China Mobile will officially launch the two new iPhones on this date.The market dynamics of the country's telecommunication industry are quickly changing and it appear that China Mobile, whose recent quarterly results failed to meet market's expectations, could emerge as the biggest beneficiary of this change.

China Mobile is the world’s largest mobile phone carrier with more than 759 million customers and dominates China’s enormous mobile market with 62.3% of the country’s market share. Apple has been operating in the country through its deal with China Unicom, which holds 22.6% market share and with China Telecom, with a 15.1% share. Since these two carriers represent a small portion of the Chinese market, therefore, only a deal with China Mobile could have a meaningful impact on Apple’s market share in the country.

The new 4G license and a deal with Apple could also do wonders for China Mobile as it would considerably improve its service offering, since 4G is nearly 10 times faster than the 3G service. The company has struggled due to the poor service of its domestic 3G network. While China Mobile had a lot more subscribers than its rivals, it had a considerably lower percentage of 3G customers as compared to China Unicom and China Telecom. Out of its total subscribers, 22% were 3G customers, as compared to China Unicom and China Telecom, whose 42% and 54% subscribers were using 3G services.

For Apple, it still remains to be seen whether a deal with China Mobile can have a meaningful impact on the smartphone vendor’s top and bottom line. The much rumored “low-priced iPhone” hasn’t arrived as 5C will still be expensive for an average Chinese customer.

In China, the 5C could to sell for 4,488 Yuan ($730), which is only 800 Yuan ($130) less than a 5S. According to the research firm Gartner, around 50% of China’s smartphones shipments lie within the 700 to 1500 Yuan range. In other words, even the "cheaper" 5C is going to be 3 times as expensive as a phone that is priced at the high end of Gartner’s range.

However, Apple still can generate significant revenues from China if its phones are offered by China Mobile. How? Out of all the Chinese telecom operators, China Mobile has the wealthiest subscriber base. Analysts believe that around 10% of China Mobile’s customers could start using Apple’s iPhones. 10% of China Mobile’s subscriber base is nearly 76 million, which is an attractive opportunity for growth right there.

Armed with a 4G license, even with Apple’s relatively expensive phones, China Mobile is targeting rapid growth in the coming years due to the expected arrival of low-priced 4G phones which will be available from the second half of 2014. China Mobile believes that some of these phones will be priced below 1000 Yuan, which is less than $162.

While these low priced 4G phones could do wonders for China Mobile, they are going to create a challenging business environment for Apple. However, it is a win-win for China Mobile. The company could tap into the premium subscriber base with Apple's iPhones and the low-end of the market with the lower-priced 4G compatible phones.

In its last quarterly results, China Mobile failed to meet market’s expectations due to the increasing competition from mobile instant-messaging services, such as Tencent's WeChat. Moreover, increasing investments in the 4G infrastructure also hurt its profits. In the third quarter the company’s net profit dropped by 8.8% from last year to 28.37 billion Yuan ($4.65 billion), below market’s expectations of 30.72 billion Yuan ($5.05 billion).

Ironically, its mobile data traffic increased 82% from last year and 19% from the previous quarter to 142.1 billion MB. Its 3G customer base rose by a massive 124% from last year and 23% from the previous quarter to 169.50 million, but, as mentioned earlier, this is just around 22% of its total customer base.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website

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