The inconclusive talks between head honchos of China Mobile (NYSE:CHL) and Apple (NASDAQ:AAPL) CEO Tim Cook, regarding iPhone 5 is a huge boon for China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA). At present these two carriers have exclusive access to iPhone users in China. But we don’t expect China Mobile to offer the iPhone 5 anytime soon as its existing infrastructure doesn’t support the device, and we are skeptical that China Mobile would want to make additional capital spending for a phone that has already been in the market for over three months. We also don’t expect Apple to provide capital support or concessions to China Mobile, as it will set a dangerous precedent for future products in the world’s largest consumer market. (see Apple Faces China Mobile-Sized Stumbling Block Limiting China Upside Potential)
We believe China Unicom is well positioned to benefit from a continued delay by China Mobile to launch the iPhone 5. China Unicom added 3.257 million 3G customers in November 2012, while China Telecom and China Mobile were at 3.11 million each. The popularity of the iPhone 5 coupled with Apple’s aggressive push in China, a population with a growing middle class and strong affinity to American products, will see China Unicom riding Apple’s coattails in the near future.
China Supports iPhone Growth Story And Thus China Unicom
At close to 55% of Apple’s value, according to Trefis estimates, the iPhone is the single most important product for the company. The iPhone’s global mobile phone market share has steadily increased from zero at the start of 2007 to around 5.4% in 2011. The iPhone unit sales have been growing at an average annual rate of about 90% every year. This year, however, we estimate iPhone sales to grow at less than 45% for the full year, despite accounting for what we think will be a strong Q4. (see Apple’s Valuation Remains A Steal, Sticking With $710 Estimate)
With the smartphone market in developed regions such as the U.S. saturating (U.S. smartphone sales grew y-o-y by just 9% in Q2), Apple will be looking to tap the fast-growing emerging markets such as China to grow at historical rates. China, despite being only in the early stages of smartphone adoption, has already pulled ahead of the U.S. as the world’s largest smartphone market by volume. This is an incredible statistic, given that 3G penetration in China stands at only about 20% currently. Considering the huge 2G subscriber base that are looking to upgrade to 3G, the potential for China Unicom is huge. These subscribers will potentially switch from China Mobile to China Unicom for the iPhone 5 or existing customer upgrade will both result in higher revenue per user for the company.
Apple’s revenues from greater China, which includes mainland China, Hong Kong and Taiwan, grew 26% year-on-year in Q3 and accounted for 15% of Apple’s revenues for the fiscal year. The rise in these numbers will push China Unicom to consistently increase its market share at the expense of China Mobile. China Unicom has been steadily growing its 3G subscribers in 2012. It grew at a staggering 83% in 2012 (tlll end of November), adding 33.305 million new 3G users.
As the country grows and the average Chinese buyer sees an increase in purchasing power, we expect to see a growing shift in demand from 2G to 3G smartphones. China Unicom can help Apple tap this phenomenal growth in demand.