China, the world’s largest mobile market by subscriber base, saw a 1.23 % increase in mobile subscribers February to close in on the billion subscriber mark. 3G adoption rates continued to see healthy growth as each of the country’s three national carriers, China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom, saw a growing number of 3G net additions.
China now has about 144 million 3G subscribers out of a total of 999.7 million mobile phone users. While this 14.4% penetration is still low, it is more than double the penetration levels we saw a year ago. With 3G services seeing strong demand and penetration levels still low, we see the dominant player in the mobile semiconductor industry, Qualcomm (NASDAQ:QCOM), benefiting hugely from an increased penetration of 3G smartphones.
Our price estimate for Qualcomm is $67.50, about 2% ahead of market price.
Increasing 3G penetration will benefit Qualcomm in two ways:
1. Increased sales of chipsets supporting 3G technology
Qualcomm is the industry leader in developing mobile chipsets. Its mobile device chipsets division contributes around 60% of its total revenues and more than 40% to the company’s overall value, by our estimates. Handset vendors ranging from Samsung, Apple and Nokia to Huawei and ZTE use its chipsets.
The company scored a huge win last year when it secured the iPhone 4S’ baseband slot, replacing Infineon completely in all of Apple’s iDevices. (see Qualcomm Gets Big Win Over Infineon with iPhone 4S) The new iPad launched recently also sports Qualcomm’s LTE chipset. This makes it very likely that the iPhone 5 also have Qualcomm’s chips too. Nokia uses Qualcomm chipsets in its Lumia line of smartphones. Huawei and ZTE recently awarded multi-million dollar deals to Qualcomm for manufacturing chipsets to use in their phones. 
The iPhone 4S was launched in China on two of its three major carriers recently. With Qualcomm’s multi-mode baseband chips now available, we foresee an iPhone on the remaining Chinese carrier, China Mobile, by the end of the year. Nokia is launching the Lumia on all the three carriers on March 28th. Huawei and ZTE are leading Chinese mobile manufacturers that are growing their presence in the Chinese market through their low-cost handsets.
China’s smartphone market is blossoming, and is expected to overtake the U.S. by the year-end to be the world’s largest smartphone market by volume, according to IDC’s latest market figures.  IDC expects smartphone shipments in China to increase 52% this year to around 137 million units, giving it a 20.7% market share by the end of the year. This will be driven by subsides given by carriers on smartphones as they look to transition their huge 2G base to 3G for the higher ARPU levels that 3G drives. With 3G poised to see an explosion in demand in emerging markets such as China , we expect Qualcomm to be at the forefront of this transition.
2. Increased royalty revenues from 3G handset makers
Qualcomm is one of the largest holders of 3G patents. CDMA (Code Division Multiple Access), a wireless 3G technology that has become a world standard for the wireless communications industry was solely developed by Qualcomm. This has allowed the company to charge a royalty from handset vendors for every mobile device sold that incorporates its technology. Further, Qualcomm also licenses out its 3G technology to other chipset manufacturers that wish to sell CDMA-based chipsets to mobile manufacturers. Growth in cell phones supporting 3G technology will bring in more revenues from license fees. The licencing division is Qualcomm’s most profitable division and contributes around 37% to its overall value.
However, royalty revenue per 3G phone sold in emerging markets will be lower as it is a fixed percentage of the ASP of the phones sold. 3G mobile phones in emerging markets are priced much cheaper than the ones sold in developed markets.Notes:
- After Huawei, ZTE to buy $5 billion worth telecom chips from Qualcomm and Broadcom, TelecomLead, February 22nd, 2012 [↩]
- IDC: China to pass US in smartphone shipments in 2012, ItWorld, March 15th, 2012 [↩]