IPhone 4S goes to China
Capitalizing on the huge demand for Apple's smartphone, China Unicom should be able to increase its mobile market share.
China's Ministry of Industry and Information Technology has issued a network permit to China Unicom, the country's second largest carrier, to sell the phone from this month onward, making it likely that the phone will be available for Christmas. Since its debut in October, Apple's (AAPL) iPhone 4S has ruled smartphone sales for two consecutive months at the three major carriers in the U.S.: Verizon (VZ), AT&T (T) and Sprint (S).
Our price estimate for China Unicom stock is $24, which is around 14% ahead of market price.
See our full analysis for China Unicom's stock here
Mobile share to increase
China Unicom is the No. 2 wireless carrier in China, with close to 200,000 wireless subscribers. This compares impressively to about 90 million for Verizon, the largest carrier in the U.S.
This gives China Unicom a huge subscriber base to address and market the iPhone 4S, which has already sold millions globally. However, China is a developing economy and high smartphone prices are a deterrent for many. Smartphone penetration was only around 15% in China in 2010; however, as the country grows and the average Chinese sees more buying power, the demand for smartphones will increase exponentially.
In fact, we have already started seeing increasing appetite for the iPhone 4S among the Chinese. When Apple began taking pre-orders for the iPhone 4S in Hong Kong last month, it sold out within 10 minutes. Capitalizing on the huge demand for the iPhone 4S, China Unicom should be able to increase its mobile market share in China.
Margin decline will persist
The iPhone 4S, however, comes with huge subsidies that China Unicom will have to carry in return for long-term customer contracts. If the carrier manages to generate huge demand for the iPhone 4S, the subsidies it will incur will take a heavy toll on its already declining margins. The company's EBITDA margins have steadily declined from 42% in 2008 to 29% in 2010 and we expect it to fall further to around 24% this year.
ARPU levels to increase
Although there will be a near-term impact on margins, the company should be able to recover over the longer term. The average revenue per user (ARPU) for a smartphone is far higher than for a standard phone, 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 expiration of the lock-in period. Also, it allows users that would have otherwise not bought the expensive iPhone, to use it and be addicted to its technology and faster data speeds, thereby driving future revenues for the carrier.
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