We are in the middle of a smartphone revolution in China. There are strong fundamentals to support this even in a hard lending scenario.
The availability of affordable smartphones (less than USD$130) will trigger explosive smartphone adoption in China. China Mobile (CHL) is a leader in the voice segment, but was losing ground in the smartphone segment. However, its main competitive disadvantage (lack of handset variety) is now fixed. As a result, in a few months and for the first time in history, we will see China Mobile, the world’s largest mobile operator, finally having two of the world’s most popular smartphones, iPhone and Galaxy SIII, in its stores. This will be a game changer.
When China Mobile’s 600+ million 2G subscribers will come to stores next time to renew their phone, many of them will get smartphones, which are much more profitable for telecom companies. Additional factor to consider – China Mobile is the only operator building 4G network in China, which will make competitors’ networks obsolete in two-three years
70% of Chinese users are now able to afford a smartphone, as prices declined dramatically (less than $130), and disposable income increased. Current smartphone penetration is less than 10%. Smartphone subscribers are more profitable for telcos, as they have 40-50% higher revenue per user and better retention rates.
Up to now, a limited handset catalog was the main bottleneck for China Mobile. Only 7% of the handsets introduced in China in 1H12 were working on China Mobile's network. Customers were switching to competitors (China Unicom and China Telecom). Now this bottleneck is fixed, as leading chipset developers (Qualcomm, Marvell) have introduced new multi-standard chipsets that support China Mobile’s 3G standard. Now it became much easier for handset developers to make products compatible with China Mobile network, and get access to CHL’s 680+ subscribers.
Unlike its competitors, CHL’s size gives the company negotiation power against Apple, which will help keep subsidies at the low levels (currently – 4% of revenue vs. competitors’ 20-30%). China Mobile is crucial for Apple, as currently it is loosing Chinese market to Android. Apple needs CHL’s distribution networks and 680m subscribers, which makes Apple’s negotiation stance weaker.
The launch of CHL’s 4G network in 2013-2014 will make 3G networks of competitors obsolete (who wants to buy an old-fashioned slow phone?). Only CHL is building 4G in China. Competitors will need three-four years and a very large infusion of capital to build a full-size network.
This thesis is resilient in the face of a hard landing scenario. The voice segment is similar to utility (average monthly bill less than $10 – similar to US and Europe, on a GDP per capita prorated basis). Mobile data growth is a secular trend - mobile internet boom in US started in the middle of the crisis.
Have great investment ideas of your own? Click here to enter the Value Investing Challenge and win a chance to speak at the next Value Investing Congress in NYC this October.