Qualcomm Rides China's Smartphone Boom

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- China, the world's largest mobile market by subscriber base, saw a 1.23 % increase in mobile subscribers February to close in on the billion subscriber mark.

The three national telcom carriers -- China Mobile ( CHL), China Unicom ( CHU) and China Telecom -- continue to see healthy 3-G adoption growth rates.

China has about 144 million 3G subscribers out of a total of 999.7 million mobile phone users. While this 14.4% penetration is still low, it is more than double the penetration levels from a year ago. With 3G services seeing strong demand and penetration levels still low, we see the dominant player in the mobile semiconductor industry, Qualcomm ( QCOM), benefiting hugely from an increased penetration of 3G smartphones.

Our price estimate for Qualcomm is $67.50, about 2% above of market price.

See our full analysis for Qualcomm's stock here.

Increasing 3G penetration will benefit Qualcomm in two ways. First it will increased sales of chipsets supporting 3G technology. Qualcomm is the industry leader in developing mobile chipsets. Its mobile device chipsets division contributes around 60% of its total revenues and more than 40% to the company's overall value, by our estimates. Handset vendors ranging from Samsung, Apple and Nokia to Huawei and ZTE use its chipsets.

The company scored a huge win last year when it secured the iPhone 4S' baseband slot, replacing Infineon in all of Apple's iDevices. The new iPad launched recently also sports Qualcomm's LTE chipset. This makes it very likely that the iPhone 5 also have Qualcomm's chips, too. Nokia uses Qualcomm chipsets in its Lumia line of smartphones. Huawei and ZTE recently awarded multi-million dollar deals to Qualcomm for manufacturing chipsets to use in their phones.

The iPhone 4S was launched in China on two of its three major carriers recently. With Qualcomm's multi-mode baseband chips now available, we foresee an iPhone on the remaining Chinese carrier, China Mobile, by the end of the year. Nokia is launching the Lumia on all the three carriers on March 28th. Huawei and ZTE are leading Chinese mobile manufacturers that are growing their presence in the Chinese market through their low-cost handsets.

China's smartphone market is blossoming, and is expected to overtake the U.S. by the year-end to be the world's largest smartphone market by volume, according to IDC's latest market figures. IDC expects smartphone shipments in China to increase 52% this year to around 137 million units, giving it a 20.7% market share by the end of the year. This will be driven by subsides given by carriers on smartphones as they look to transition their huge 2G base to 3G for the higher ARPU levels that 3G drives. With 3G poised to see an explosion in demand in emerging markets such as China , we expect Qualcomm to be at the forefront of this transition.g

Second, we expect increased royalty revenues from 3G handset makers. Qualcomm is one of the largest holders of 3G patents. CDMA (Code Division Multiple Access), a wireless 3G technology that has become a world standard for the wireless communications industry was solely developed by Qualcomm.

This has allowed the company to charge a royalty from handset vendors for every mobile device sold that incorporates its technology. Further, Qualcomm also licenses out its 3G technology to other chipset manufacturers that wish to sell CDMA-based chipsets to mobile manufacturers.

Growth in cell phones supporting 3G technology will bring in more revenues from license fees. The licensing division is Qualcomm's most profitable division and contributes around 37% to its overall value.

However, royalty revenue per 3G phone sold in emerging markets will be lower as it is a fixed percentage of the ASP of the phones sold. 3G mobile phones in emerging markets are priced much cheaper than the ones sold in developed markets.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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