The past week saw quite a few developments in the Chinese telecom sector. China Mobile (NYSE:CHL) confirmed that it is in talks with Apple (NASDAQ:AAPL) to sell the iPhone but declined to predict if the popular smartphone would arrive on its network before the end of the year. This however did not stop its stock from continuing to fall as China’s growth concerns weighed on the stock. China Unicom (NYSE:CHU), meanwhile, boosted its 3G plans with the launch of a faster HSPA+ network on May 17.
China Mobile-iPhone deal
China Mobile said at a shareholder meeting May 16th that it is currently in talks with Apple to offer the iPhone on its network.  However, it declined to predict as to when it expects to close the deal. This is most likely to do with Apple’s (as well as partners’) usual reticence with regards to the launch date of the next-generation iPhone.
Apple has already signed deals with both China Unicom and China Telecom (NYSE:CHA) to sell the iPhone. However, China Mobile’s proprietary TD-SCDMA 3G network has been a huge stumbling block in the way of an Apple-China Mobile iPhone deal. With Qualcomm’s recent announcement of a baseband chip that supports not only China Mobile’s 3G network but also its 4G TD-LTE network, which is still under trials, it will finally be possible for Apple to release an iPhone on the world’s largest carrier. (see Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal)
China Mobile has so far managed to overcome its 3G shortcomings by building out a nationwide Wi-Fi network. But the unavailability of an unsubsidized iPhone on the nation’s largest wireless carrier is a serious deterrent to widespread 3G adoption. The fact that as of March 2012 China Mobile had still managed to add about 15 million iPhone customers, customers who not only forked out the full price of the iPhone but also have had to make do with China Mobile’s 2G network, is testimony to the huge untapped potential. With the iPhone, China Mobile will get a huge opportunity to promote 3G and transition its huge 2G subscriber base to 3G.
China’s growth concerns
China Mobile has fallen more than 4% off its yearly highs recorded last week as concerns about China’s overall growth dented investors’ optimism surrounding the largest wireless carrier in the world. Macroeconomic data for the month of April that came out of China last week added fuel to existing concerns that the country’s economic growth was slowing. ((Fresh China data raise growth fears, Financial Times, May 11th, 2012)) Earlier, quarterly data had shown that China’s GDP growth had fallen down to 8.1 percent a year in the first quarter of 2012, a sequential drop of 0.8 percent over the previous quarter. Investors then were anticipating a milder drop to 8.4 percent.
However, much of the slowdown in China’s growth rates is stemming from a drop in demand for its exports in key markets including the US and Europe. The fact that China Mobile’s growth is not dependent on exports but internal domestic consumption of its wireless services therefore gives reason for a more balanced view of the company’s prospects.
While the era of double-digit growth rates in the world’s largest economy may be over, we expect the economy to still grow at a 7-8% clip. Even the country’s Five-Year Plan for 2011 to 2015 had called for annual long-term GDP growth of 7 percent. At this rate, millions of Chinese will still enter the middle-class strata every year. Increasing disposable income will see demand for 3G services increase in the coming years. Further, a low 3G penetration of only about 15% in China is a massive opportunity for China Mobile to promote 3G widely. We have a$59 price estimate for China Mobile, about 10% ahead of the current market price.
’4G’ rollout in China
Following in AT&T’s footsteps in the U.S., China Unicom became the first to roll out the faster HSPA+ 3G network in the country this week. HSPA+ is the same technology that, although not technically right, AT&T touts as 4G and markets effectively as a ploy to maintain its iPhone lead over rivals in the U.S. It looks like China Unicom is looking to use the same playbook to not only promote 3G but also retain a competitive edge over rival China Telecom, to whom it recently lost its iPhone exclusivity in March. As the 3G battle heats up, it needs to fend off behemoth China Mobile as well, which is also likely to get the iPhone soon. (see China Unicom Speeds Ahead In Smartphone Race With HPSA+ Rollout)Notes:
- China Mobile in Talks With Apple on iPhone Cooperation, Bloomberg, May 16th, 2012 [↩]