Apple Inc. (AAPL), China Mobile Ltd. (ADR) (CHL): Why the C in 5C Doesn’t Stand for “Cheap”

So why should Apple try its hand at a low-margin, highly competitive market? It’s best for it to stick with high-end products, and go after the telecom companies. It successfully did just that with China Unicom and China Telecom in 2009 and 2012, respectively. And it received regulatory approval to run on China Mobile Ltd. (ADR) (NYSE:CHL)’s network this month, which puts Apple one step closer to closing a deal with the world’s largest wireless service provider.

A deal with China Mobile Ltd. (ADR) (NYSE:CHL) ought to come later this year as the company upgrades its network and rolls out its 4G LTE service. If the company agrees to subsidize iPhones, as China Telecom and China Unicom do, it could significantly boost iPhone sales in the country. Analysts see such a deal adding 10 million to 25 million additional iPhone sales next year, and up to 100 million additional iPhones by 2020.

Apple Inc. (NASDAQ:AAPL) has overcome the biggest hurdle, regulatory approval, now it just needs to work out the numbers with China Mobile Ltd. (ADR) (NYSE:CHL). China Mobile Ltd. (ADR) (NYSE:CHL)’s hesitation is understandable. For one, carrying the iPhone might increase the load on the network dramatically before it’s able to handle it. That could cause customer complaints and higher churn.

Moreover, during the first two years the company carries the iPhone, China Mobile Ltd. (ADR) (NYSE:CHL) will likely pay out significantly more subsidies, putting a damper on cash flow and profit growth for the company. China Unicom and China Telecom experienced a similar pattern.

Still, a deal seems close to happening. When it does, it ought to boost iPhone sales, as 35 million “gray-market” iPhones already operate on the China Mobile network.

Two is better than one
While Apple Inc. (NASDAQ:AAPL) is experiencing a sell-off on the news that the 5C is priced higher than expected and the company has yet to complete a deal with China Mobile Ltd. (ADR) (NYSE:CHL), I think management deserves commendation. It broke away from its usual business model, but didn’t sacrifice margins. Instead, it’s capitalizing on a growing trend it sees in smartphone consumers to improve its weakening (but still stellar) margins and average selling price.

For investors, now seems like a good opportunity to get into the stock with a 5% sell-off and the China Mobile catalyst looming.

The article Why the C in 5C Doesn’t Stand for “Cheap” originally appeared on Fool.com and is written by Adam Levy.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile.

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