Tech Trader Daily: Nokia's Xiaomi Deal Shows Big Opportunity in China, Says Credit Suisse -- Barron's Blog

By Tiernan Ray 

Credit Suisse's Kulbinder Garcha this morning reiterates an Outperform rating on shares of Nokia ( NOK), and a $5.75 price target, following the announcement by the company that it has signed a deal with China's privately held mobile technology upstart, Xiaomi, to license one another's patents over the course of several years. 

Noting that "this is the first patent deal for Nokia in China," Garcha opines the deal "clearly shows that Nokia continues to make progress in signing patents with smartphone vendors," including deals with Samsung Electronics in February and July of last year, and a deal with Apple ( AAPL) this past May. 

"The deal again highlights the quality of Nokia's patents in mobile," writes Garcha, "along with its ability to negotiate with more vendors like Huawei, LG and tier- 1 China brands, especially the ones which have global ambitions." 

As far as the financial benefit, Garcha notes that Xiaomi had shipments of 53 million smartphones last year, at an average price of $142, which implies its revenue was $7.5 billion. 

"While Nokia has not disclosed the royalty rate, if we were to assume 0.25%/0.50%/0.75% rate, this can generate an incremental revenue (all of which should flow to EBIT) of around EUR15mn/EUR35mn/EUR50mn depending on the rate," he estimates. 

"This would imply 1-2% incremental EBIT on CS/consensus estimates for 2018." 

"But more importantly, we estimate that the top 6 China brands (Huawei, OPPO, vivo, Xiaomi, Lenovo and ZTE) together will sell 575mn smartphones in 2017, which shows the opportunity for Nokia's patent business in China longer term." 

Nokia shares today are up 4 cents, or 0.7%, at $6.20.