China Telecom to Become Nation’s Second Carrier to Offer Apple’s IPhone

China Telecom Corp. (728) will become the nation’s second wireless operator to offer Apple Inc. (AAPL)’s iPhone 4S, two months after “staggering” demand prompted the U.S. company to suspend sales at its own stores.
From March 9, users who commit to a two-year contract can get a free 16-gigabyte handset with a service plan costing 389 yuan ($62) a month, the state-owned parent of China Telecom, the nation’s third-largest wireless carrier, said in a statement today. A three-year plan cuts the monthly minimum to 289 yuan. China Telecom shares rose the most in six months.
For Apple, adding China Telecom as a distributor in the world’s largest mobile-phone market almost doubles the number of potential iPhone buyers who can get a subsidized handset from a service operator. That may alleviate some of the supply bottleneck that led to Apple’s main Beijing store being pelted with eggs when it didn’t open for the first day of iPhone 4S sales in January.
“This is definitely going to give a plus to Apple shipments,” said Sandy Shen, a Shanghai-based analyst at research company Gartner Inc. “On the other hand, China Telecom is still the country’s smallest mobile operator, so the extent to which it can help Apple may be limited.”
China Telecom shares gained 4.1 percent to close at HK$4.60 in Hong Kong trading, the largest gain since Aug. 25.

China Unicom

China Unicom (Hong Kong) Ltd. (762), the nation’s first carrier to offer the iPhone with a service contract in October 2009, began selling the 4S in January. China Unicom had 43 million subscribers to its high-speed, third-generation network at the end of January. China Telecom had 38.7 million 3G subscribers at the end of last month.
Apple was the fifth-largest smartphone vendor in China in the fourth quarter, with shipments of 2.08 million handsets, or 7.5 percent of the total, according to Gartner data. Samsung Electronics Co. was the market leader with 24 percent, followed by Nokia Oyj (NOK1V), Huawei Technologies Co. and ZTE Corp. (000063), according to Gartner.
China Telecom will make an “appropriate increase in marketing initiatives” in connection with iPhone sales, the company said in a filing to the Hong Kong stock exchange today. Expenses to market the phone will mean “short-term pressure on its profitability,” it said, without providing figures.

Earnings Estimates

“The iPhone will be positive for China Telecom’s subscriber growth, but it will be negative for earnings growth in the first year,” Lisa Soh, a Hong Kong-based analyst at Macquarie Group Ltd., said in a phone interview today. “Earnings estimates will have to come down because of higher subsidies for the iPhone.”
Soh said she hadn’t updated her earnings estimates yet to account for iPhone sales. China Telecom’s earnings growth could be cut roughly in half to about 5 percent, said Jim Tang, an analyst at Shenyin Wanguo Securities Co. in Shanghai. Higher iPhone subsidies will force the company to cut subsidies for cheaper models that have been the main driver of user growth, Tang said.
Cupertino, California-based Apple had underestimated the “staggering” demand for the iPhone 4S when it started sales in China, Chief Executive Officer Tim Cook said last month.
“We thought we were betting bold,” Cook said on a Jan. 24 conference call. “We didn’t bet high enough.”

Pelted With Eggs

Apple’s oldest store in China was pelted with eggs from a crowd of customers on Jan. 13 when the shop, in Beijing’s Sanlitun district, failed to open on the first day of sales for the iPhone 4S. After police sealed off the area to remove more than 500 people, Apple said it would suspend sales of iPhones at all its stores.
IPhones are available in China through Apple’s online store, resellers and China Unicom.
“IPhone 4S has been an incredible hit with customers around the world,” Carolyn Wu, a Beijing-based spokeswoman for Apple, said by phone. The company “can’t wait to get it into the hands of even more customers in China,” she said.
China Mobile Ltd. (941), the world’s largest carrier by customers, is now the only Chinese wireless company not offering the iPhone with a service contract. The iPhone doesn’t support the provider’s third-generation network, based on a China- developed technology.