China Telecom Readies for iPhone Frenzy as Demand Boils

China Telecom’s (NYSE:CHA) long wait for Apple (NYSE:AAPL) iPhone could soon end as Chinese regulators approved Apple’s application for a handset that operates on the CDMA2000 network standard, a technology supported by China Telecom. ^[1] The 3G subscriber growth in China has been rapid over the last few years and hence the timing of the iPhone coming to China Telecom’s network seems ideal. Last week when the 4S was supposed to be available in Apple stores in China, unruly crowds forced the company to delay its launch. This sizzling demand should benefit China Telecom though we believe the higher subsidy costs associated with iPhone could be detrimental to the company’s margins in the near term.

Our $68 price estimate for China Telecom stock is about 20% above market price.

See our complete analysis of China Telecom here

China Telecom’s ARPU levels will increase..

The average revenue per user (ARPU) for a smartphone user  is far higher than a featured phone one, and this allows carriers to recover money over the course of the contract period. This not only drives data revenues but also reduces churn, or the migration of smartphone users to competing carriers, as customers cannot change carriers before the expiry of the lock-in period. It also migrates users who might not have otherwise bought an expensive phone to grow accustomed to faster data speeds, better applications and technology from these iPhones, thereby driving future revenues for the carrier.

..But margins could come under pressure

iPhone generally carry higher subsidies than a normal smartphone. For the sake of comparison, China Unicom (NYSE:CHU) margins suffered after the company started selling the iPhone. ^[2] China Unicom is the China’s second largest telecom provider and is currently the only one of the nation’s three carriers offering the iPhone with a service contract.

China Unicom recently even started selling iPhone 4S for free with $45 monthly contract for a multi-year service contract. ^[2] Although this has attracted more subscribers to buy an iPhone, it means that China Unicom’s margins could continue to decline due to escalating subsidy costs. China Telecom could also be forced to follow such promotional offer, which will put its own margins under huge pressure.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Apple Moves a Step Closer to Offering IPhone to China Telecom Subscribers, Bloomberg citing The China Radio Management Office website as the source, January 10th, 2012 [↩]
2. China Unicom Offers Free IPhone 4S for $45 Monthly Contract, Bloomberg, January 6th, 2011 [↩] [↩]