Everybody in the telecom markets is watching China Mobile (CHL), and that’s part of the problem. Yesterday, China Mobile said it will increase capital spending by 22%, with a third going to the expansion of its newly launched 4G mobile services. The company also plans to sell 100 million 4G devices and have 50 million users by the end of the year.
The company announced it had sold more than 1 million iPhones since the mid-January. That was enough to introduce a little skip in the step of Apple’s stock, which has firmed up recently.With iPhone launched on China Mobile’s network, Apple CEO Tim Cook sees this as one of the company’s big growth drivers.
Raymond James analyst Travis McCourt pointed out that Apple and Qualcomm (a chip supplier to Apple) are the potential big winners at China Mobile, but how exactly it unfolds bears watching.
“Importantly for Apple, it appears it is grabbing the majority of share of 4G devices sold, as 1 million out of 1.34 million implies 75% share thus far,” wrote McCourt in a research note. “From a share perspective, this is positive for Apple, and Qualcomm, as well, as a chip supplier to Apple, but with volumes low, this is an initial disappointment. However, if share is maintained throughout the year it may be more material for both companies as the year progresses.”
It’s not just about Apple, of course. Lots of people sell into China Mobile, including telecom network integrators such as Alcatel-Lucent (ALU) and component supplier JDSU (JDSU).
This morning, MKM Partners analyst Michael Genovese upgraded JDSU to a “Buy.” JDSU shares have been rising lately, and Genovese wrote in a research note this morning that JDSU is a “key beneficiary” of growth in mobile and 100G optical, especially at China Mobile. MKM now has an $18 price target on JDSU, which is based on a multiple of 16x analyst Michael Genovese’s FY15 EPS estimate, plus the $3 per share in net cash the company will have.
MKM expects margins to expand for JDSU, adding a percentage point during fiscal year 2015. Genovese also believes JDSU’s new Trendium (LTE Service Assurance) and Arieso (Geo-location) products have potential, which recent orders strong. At the same time, general optical components should see a solid boost.
Not everybody is so optimistic, however. Raymond James analyst Simon Leopold warns of getting too excited about the optical components play in China. The presentation by China Mobile indicated that investment in some optical transmission equipment could actually decline, “and this potentially could be a negative for China-exposed optical component vendors.”
Another area to watch at China Mobile is TD-LTE base stations, which are necessary to roll out the 4G network. Vendors in China Mobile include Huawei, ZTE, Datang Mobile, and FiberHome Technologies in China and Alcatel-Lucent, Ericsson, and Nokia Siemens internationally. The Chinese suppliers get the bulk of the business (of course). Leopold wrote in his research note that “this could also drive upside for vendors such as Alcatel-Lucent and Nokia Solutions Network.
So, it looks like lots of people are throwing their lot in with China Mobile. That’s because as a “growth driver,” this is one of the last great carriers ramping mobile growth. With growth developed countries leveling off, and North Amercian carriers duking it out for the last drips of mobile market share, where else is there to look?
While it looks great on paper, there are plenty of risks. Business in China is not as straightforward as it is in the West, with a lack of transparency. And with macro risks of the Chinese economy growing with increasing debt defaults, Chinese telecom enthusiasts have plenty of things to watch out for. Everybody trolling for China Telecom winnings might want to keep this in mind: “Jake, this is Chinatown.”