Mobile Weekly Notes: iPhone 6 China Launch, Samsung’s Semiconductor Plans

The mobile and electronics industry had an interesting week, with Apple (NASDAQ:AAPL) finally announcing a launch date for its new iPhones in China and Samsung (PINK: SSNLF) outlining plans to build a large semiconductor manufacturing facility in South Korea. Here’s a brief roundup of the news that mattered in the mobile and electronics industry.

iPhone 6 Finally Gets A Launch Date For China

Apple announced that it would start selling its new iPhone 6 and 6 Plus models in China on October 17, after it was granted a key network access permit from the Chinese government. While the new phones hit store shelves in the United States and several other countries on September 19, China – the world’s largest smartphone market – was notably absent from the list of launch countries, creating an overhang on Apple’s stock over the last few weeks. Now, with the launch date set, we believe that Apple is likely to see strong initial demand in the Chinese market, given its prior lack of a large-screen offering and also due to the preference for large-screen phones in China. While pre-orders for the devices will begin on October 10, Chinese retailers reported that reservations (which don’t require payment) topped 6 million by Saturday, October 4. ^[1] That said, Apple will have to contend with some longer-term issues in the Chinese market. Its devices have been facing increasing scrutiny relating to personal data security from the Chinese government ^[2] and this could bring about some skepticism among Chinese customers. Additionally, China’s state-run wireless carriers such as China Mobile (NYSE:CHL) are scaling back on their device subsidies, which could entice customers to opt for cheaper, yet feature-rich handsets offered by local players such as Huawei and Xiaomi.

• We have a $97 price estimate for Apple, which translates to a market cap of around $580 billion. Our price estimate is slightly below the current market price. We estimate the company’s FY 2014 EPS at around $6.27, compared to a consensus estimate of around $6.33 according to Reuters. We are modeling iPhone shipments of around 172 million units for CY 2014, with the number rising to around 190 million units in CY 2015. We estimate the company’s CY 2014 revenues to come in at around $182 billion.
• Apple’s stock remained relatively flat, closing just below $100 last week.

Samsung Beefs Up Semiconductor Investments

Samsung Electronics will invest about 15.6 trillion won (about $14.5 billion) to build semiconductor manufacturing facilities in the Gyeonggi province in South Korea. ^[3] The construction of the plant – which will fabricate both memory chips and processors –  is set to begin next year, with operations expected to commence in 2017. Samsung’s bread-and-butter smartphone business has been facing significant headwinds of late, with its high-end products challenged by Apple’s large-screen iPhones and its budget offerings facing competition from vendors such as Xiaomi and Lenovo. Now, the investment- which marks the company’s largest initial spending on a semiconductor plant – could be an indicator the company is refocusing its growth strategy towards components, which is an area where it has competitive advantages owing to its technology and scale. During Q2 2014, the semiconductor division saw revenues rise by around 13% year-over-year, while mobile device sales declined by about 20%. While Samsung’s semiconductor business is very profitable (FY 2013 adjusted EBITDA of about 49% vs. 22% for telecom), it is extremely capital intensive (estimated $13.3 billion capex in 2013 vs. $1 billion for telecom). The planned semiconductor and components-related investments could be a reason why the company has been holding on to its cash (which stood at over $55 billion during Q2), without meaningfully increasing its dividend or initiating share buybacks.

• Trefis has a $1,200 price estimate for Samsung, which implies a market cap of around $177 billion. Our price estimate is about 8% ahead of the current market price. We estimate the company’s FY 2014 EPS at around $170, compared to a consensus range of $110 to $180 according to Reuters. We are currently updating our valuation model and price estimate for the company.

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1. The iPhone 6/6+ in China: Six million and counting, Fortune, October 2014 [↩]
2. Apple to Start Selling New IPhones in China Next Month, Businessweek, September 2014 [↩]
3. Samsung to Build $15 Billion Chip Plant as Phones Stall, Bloomberg, October 2014 [↩]