China to Drive Qualcomm's Growth - Analyst Blog

Qualcomm Inc. QCOM, the largest mobile chipset developer globally, is expected to gain significantly in China over the near term. China Mobile, the largest mobile operator in the world in terms of subscriber count, has decided to offer discounts on smartphones that will run on its superfast 4G LTE (Long-Term Evolution) network. China Mobile is expected to sell about 100 million LTE-enabled phones by the end of 2014.

China Mobile has decided to sell five-mode LTE-enabled handsets only from Jun 2014. We expect Qualcomm will benefit the most from this decision as the company has the most powerful portfolio of five-mode LTE chipsets developed on its state-of-the-art baseband technology. The five-mode standard includes LTE, FDD-LTE, TD-SCDMA, WCDMA and GSM.

At the end of Feb 2014, China Mobile had around 775.6 million wireless subscribers. During the first two months of 2014, it added 1.43 million LTE subscribers. Additionally, China Unicom and China Telecom have also started deploying LTE services. We believe the growing deployment of LTE networks in China will boost royalty revenues of Qualcomm as more LTE-enabled handset will enter the Chinese market. 

Qualcomm has more than 250 royalty bearing licensees worldwide. Additionally, the company has over 90 single-mode OFDMA licensees. The company also launched its innovative RF360 Front End Solutions. This new technology will solve the problem of LTE fragmentation faced by most of the large handset manufacturers. Currently, Qualcomm carries a Zacks Rank #2 (Buy).

However, a major concern for Qualcomm is the regulatory uncertainties in China. The company is facing an anti-monopoly investigation by the National Development and Reform Commission (NDRC), the regulatory authority of China. The company stated that it isn't aware of any activity that violates the anti-monopoly law in China and will continue to cooperate with NDRC. The investigation is likely to impede Qualcomm's growth in China.

Moreover, aggressive competition in the mobile phone chipset market may hurt Qualcomm's profits going forward. The company is facing severe competitive threat from its closest rival, Intel Corp. INTC, which has started shipping its first multi-mode LTE baseband modem.

Competition is likely to emanate from formidable rivals like Broadcom Corp. BRCM and Nvidia Corp. NVDA. The company also faces competition from low-cost chipset suppliers like Mediatek of Taiwan, VIA Technologies and Spreadtrum Communicationsof China.