China's 4G Race

Last week, China's Ministry of Industry and Information Technology awarded 4G contracts to several domestic telcos. According to a Forbes article, China plans to spend over $16.4 billion on 4G infrastructure. 

Investors in several companies stand to profit from these deals. Three 4G contracts were awarded to the largest mobile service providers in China: China Mobile  (NYSE: CHL  ) , China Unicom, and China Telecom. These contracts further raise hope that the rumored China Mobile-Apple (NASDAQ: AAPL  ) deal will go through. 

How Apple, Nokia, and Samsung will profit
In addition to buying the telecommunications companies themselves, investors can play these contracts for profits by buying shares of Apple (NASDAQ: AAPL  ) , networks solutions and infrastructure companies, and 4G chip manufacturers.

Apple is rumored to be close to reaching a deal with China Mobile that would see its new iPhones, the 5s and 5c, carried by the worlds largest mobile network provider. The influx of 4G infrastructure would guarantee that these iPhones could be supported by China Mobile. 

According to Barron's, the deal will raise Apple's EPS by $3-$6. Because it's unknown how much China Mobile will subsidize the phones, it's worth examining how other Chinese carriers have subsidized iPhones for their own subscribers. According to Phoenix Tech, the iPhone 5s will cost  $898 on China Unicom without a contract. But, if customers sign up for a 30-month contract (that costs about $63 per month), they will get the phone for free.

One downside to the subsidies that come with contracts is that they slow down the turnover rate for mobile phones. The turnover rate is normally 18-20 months. With potential customers spending an extra eight months on contract, Apple may sell fewer devices per year, resulting in lower revenue.

A similar contract and pricing structure could come from China Mobile. One upside to this type of contract is that it will ensure Apple keeps its 30% operating margin because it won't need to cut the retail price for Chinese consumers.

Lucrative network building contracts
In its last round of contracts, China Mobile handed out $3.3 billion. These contracts heavily favored Chinese firms, but some of the contracts were given to international firms like Nokia (NYSE: NOK  ) . Nokia is a Finland-based company engaged in the mobile infrastructure business.

According to Forbes, Nokia Solutions and Networks received about $400 million in China Mobile's latest shopping spree. Nokia recently got its struggling mobile phone division off its books by selling it to Microsoft. Now, Nokia  is ready to focus on its mobile services division.

In the third-quarter of this year, operating profit at Nokia's telecoms equipment unit, Nokia Solutions and Networks, fell 33%. However, Nokia forecast that its profit margin would grow from 8.4% to 12% in the fourth quarter. This caused Nokia's shares to increase 6%. A large portion of the this projected profit margin growth will likely come from contracts the company gets in China.

Samsung, the ultimate play
When China has fully functional 4G networks, Samsung  (NASDAQOTH: SSNLF  )  stands to profit above all.Samsung manufactures many of the 4G chips used in several of Apple's products, and also manufactures its own brand of mobile phones. Samsung will profit from this two-pronged market attack.

Samsung is also the leading smartphone vendor in China, with 21% of the smartphone market share. Samsung saw smartphone shipments soar 150% year-over-year in China. Over the past year, Samsung has struggled to keep profit margins high because of the increasing cost of labor at its factories in China. In response, the company has decided to move production of its mobile devices to Vietnam, where labor is almost 70% cheaper.

Samsung is facing significant competition for its share of the mid and low-range smartphone market. However, Nicole Peng, a Shanghai-based research director for Canalys, said if the choice is between a cheap smartphone from a Chinese brand and a Samsung smartphone that is only slightly more expensive, many Chinese consumers would choose Samsung. With its impressive growth potential in the chip and mobile phone market, Samsung remains a great buy to profit from this mobile expansion.

Foolish takeaway
Over the next few weeks, investors should note what companies win the 4G contracts. The first contracts may indicate if Chinese companies will favor their domestic counterparts, or give an equitable portion of the contracts to international firms.

When, and if, the China Mobile-Apple deal is announced, investors should examine the subsidy China Mobile will offer customers. Investors should follow Samsung and see if its incredible year-over-year sales growth continues in the Chinese market. Impressive sales growth, and higher margins thanks to lower labor costs, are key to Samsung's success. Investors have a myriad of ways to play this Chinese network boom. 

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  • Report this Comment On December 29, 2013, at 10:04 AM, xman8280 wrote:

    One believes that Velatel Global Communications formerly China Motion Mobile has the potential to make huge profits from China's 4G services. In addition, VN Technologies is owned by Velatel Global Communications, which may provide fuel cells for China Mobile backup batter for their towers. Therefore, Velatel Global Communications should be a winner in 2014.

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