Smartphones using the Android operating system from Google Inc. (NASDAQ: GOOG) have grabbed the market share lead in China with 56% share, and the iPhone from Apple Inc. (NASDAQ: AAPL) claims 9%. Nokia’s older (and cheaper) phones using the Symbian operating system had a 31% share.

Nokia’s first deal for the Lumia 800c has been signed with China Telecom Corp. (NYSE: CHA), but deals are in the works with China Mobile Ltd. (NYSE: CHL) and China Unicom (Hong Kong) Ltd. (NYSE: CHU). The company’s Lumia 900, Lumia 710 and Lumia 610c will be launched in China during the second quarter of this year.

Nokia’s brand is popular in China and the company needs to turn that popularity into sales. But because the Chinese market is more price-conscious than many others, the Lumia 800c, at about $570 without a contract, may be too costly for many potential buyers.

Paul Ausick

Strategy Analytics reports that:

Smartphone shipments grew 58 percent sequentially to reach a record 23.9 million units in China during Q3 2011. In contrast, smartphone shipments fell 7 percent sequentially to reach 23.3 million units in the United States. China has overtaken the United States for the first time to become the world’s largest smartphone market by volume.

The smartphone manufacturers that have seen success in China are different than those that have done well in the U.S. Strategy Analytics claims the most dominant smartphone companies in the U.S. are HTC and Apple. In China, they are Nokia (NYSE: NOK) and Samsung. Nokia is supposed to be the handset manufacturer in the most trouble in the industry. Apple is supposed to be the most successful. That is not true, if the People’s Republic is factored in.

Apple has been slow to make alliances in China. It has a deal with China Unicom (NYSE: CHU) but not one with the much larger China Mobile (NYSE: CHL). Absent an alliance with the number one carrier in the world’s most populous nation, Apple has a problem.

Nokia has ridden its success with low-priced phones in China to a strong position in the smartphone industry there. Nokia’s market share in smartphones has dropped throughout the rest of the world, though. Most analysts believe that its alliance with Microsoft (NASDAQ: MSFT) to put Windows Mobile onto its new smartphones will be the key to its eventual growth. That is not entire true. Not as long, at least, as it is a leader in the People’s Republic.

China has become a critical — if not the critical — market for the success of smartphone companies. Nokia’s lead in the People’s Republic is a sign that the company is not dead, as well as that Apple is not as dominant in the business as most believe.

Douglas A. McIntyre

The report notes that the success of wi-fi could actually eliminate the need for a 3G TD-SCDMA model.  The note discusses frequent inquiries about the progress with China Mobile Ltd. (NYSE: CHL) and the iPhone.  Wu noted that China Mobile is becoming important even with no official deal between it and Apple as China Mobile recently disclosed that it has some 10 million iPhones on its network and that is without support for its proprietary 3G TD-SCDMA network.

Customers are buying unlocked and unsubsidized iPhones from Apple and in the black and gray markets for prices of roughly $675 to $945 and they are using Wi-Fi and the older 2G network for coverage.  China Mobile is also said to be enticing iPhone customers by offering free gift card promotions for its Wi-Fi service.

The firm believes that Apple and the Chinese carrier remain firmly engaged and its sources indicate that iPhone prototypes using the TD-SCDMA chip sets have been under beta test for some time.

One hurdle is believed to be App Store economics, because Apple does not share revenue with carriers while the market for mobile apps in China is becoming a big deal.  Effectively, China Mobile wants a larger piece of the action.  Wu has noted, “we view the signing of China Mobile as a carrier partner as a big deal. We believe it greatly expands Apple’s China opportunity where China Mobile has more than 628 million subscribers vs. 189 million for China Unicom (NYSE: CHU). We estimate that China represents 15% of revenue and believe China Mobile could potentially double Apple’s market there.”  That could be another $2.50 to $3.50 in incremental earnings per share.

Apple shares are up 1.5% today at $405.68 and the 52-week trading range is $297.76 to $426.70.

JON C. OGG

Currently the only Chinese carrier for the iPhone is China Unicom (Hong Kong) Ltd. (NYSE: CHU), the second largest of the big three carriers, with about 155 million subscribers. China Telecom Corp. (NYSE: CHA) is the smallest of China’s large carriers and has been been in talks with Apple to produce a cheaper version of the iPhone for the Chinese market.

Whichever company gets the nod from Apple, it is very likely that the iPhone will be the company’s 3G model, not the 4G-LTE model that Apple is expected to introduce with its next iteration of the phone, the iPhone 5. China Telecom uses the CDMA network, similar to that of Verizon Wireless and Sprint Nextel Corp. (NYSE: S). Verizon Wireless is joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone plc (NASDAQ: VOD).

China Mobile uses a home-grown version of CDMA known as TD-SCDMA, which is only available in China. China Unicom uses GSM technology, similar to AT&T (NYSE: T), and that is probably the reason the company got Apple’s first contract in China.

Apple has been resisting China Mobile’s efforts to get a version of the iPhone for its network. The cost of developing the iPhone for a network technology that is expected to give way to the faster 4G-LTE network probably isn’t worth the investment at this point. China Mobile is expected to begin rolling out its 4G-LTE network next year.

The request/requirement for a cheaper version of the iPhone is probably a result of China Unicom’s poor earnings report for its first-half of 2011. The country is moving toward adoption of 3G networks where the iPhone 4 is a strong contender. But the large subsidies that Apple demands (and gets) put a lot of pressure on China Unicom’s profitability. First-half profits were down more than -9% year-over-year.

Apple still hasn’t confirmed that the iPhone 5 will operate at 4G-LTE speeds. The company is wary of the reduced battery life that is a side-effect of the higher speed networks. iPhone users have become accustomed to eight hours or so of battery life, and cutting back on that may lead to dissatisfied customers, not something that Apple is used to.

Interestingly China Mobile currently supports about 8.5 million iPhone users on its 2G network. These are users who got their hands on unlocked versions of earlier models of the iPhone.

Will Apple release an 4G-LTE compatible iPhone? Of course. The issue is when. And for China Mobile the issue is will Apple release interim versions of the iPhone that are compatible with the company’s network. The answer to that is probably not, mainly because Apple probably stands to get a bigger share of the Chinese market by putting out a cheaper phone rather than a one-off phone. Besides, China Unicom’s experience indicates that Chinese versions of the iPhone may have to be sold at lower prices than Apple is used to.

If Apple succumbs to the pricing pressure and makes a cheaper iPhone for China, other carriers in other countries will demand the same phone. Can Apple reasonably deny that request? Not unless a future version of the iPhone is worlds better than anything else on the market.

The negotiations between Apple and the Chinese carriers are a precursor to negotiations Apple will face with other carriers around the world. New CEO Tim Cook faces a big decision here. And history may not provide much of a guide.

Paul Ausick

American Eagle Outfitters, Inc. (NYSE: AEO) Raised to Neutral from Sell at Lazard.
Apple Inc. (NASDAQ: AAPL) Maintained Overweight at JPMorgan; Maintained Outperform at Credit Suisse; Maintained Buy at BofA/ML.
Ariba Inc. (NASDAQ: ARBA) Reiterated Hold at Argus.
BHP Billiton Ltd. (NYSE: BHP) Raised to Buy at Societe Generale.
Casey’s General Stores Inc. (NASDAQ: CASY) Raised to Buy at BofA/ML.
China Unicom (NYSE: CHU) Raised to Outperform at Credit Suisse.
F5 Networks, Inc. (NASDAQ: FFIV) Raised to Buy at Stifel Nicolaus.
Gol Linhas Aereas (NYSE: GOL) named Bear of the Day at Zacks.
Hewlett-Packard Co. (NYSE: HPQ) Cut to Sector Perform at RBC.
Kennametal Inc. (NYSE: KMT) Started as Outperform at Credit Suisse.
Old Dominion Freight Line, Inc. (NASDAQ: ODFL) named Value stock of the day at Zacks.
SAP AG (NYSE: SAP) Started as Buy at RBS.
Shanda Games Limited (NASDAQ: GAME) Raised to Buy at Deutsche Bank.
Silicom, Ltd. (NASDAQ: SILC) named Bull of the Day at Zacks.
Spreadtrum Communications Inc. (NASDAQ: SPRD) Reiterated Buy and Raised target to $25 at BofA/ML.
Synchronoss Technologies, Inc. (NASDAQ: SNCR) Raised to Outperform at Baird.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Alcatel-Lucent (NYSE: ALU) Cut to Hold at Deutsche Bank.
American Water Works Co. (NYSE: AWK) Reiterated Buy at Gabelli.
Aqua America Inc (NYSE: WTR) Reiterated Buy at Gabelli.
China Unicom (NYSE: CHU) Cut to Neutral at Credit Suisse.
City National Corporation (NYSE: CYN) Raised to Neutral at BofA/ML.
Commerce Bancshares Inc. (NASDAQ: CBSH) Cut to Underperform at BofA/ML.
Federated Investors, Inc. (NYSE: FII) Cut to Underperform as Bear of the Day at Zacks.
HollyFrontier Corporation (NYSE: HFC) Cut to Neutral at BofA/ML; Started as Outperform at Oppenheimer.
M&T Bank Corp. (NYSE: MTB) Raised to Buy at BofA/ML.
Microchip Technology Inc. (NASDAQ: MCHP) Maintained Buy but cut target to $40 at Gleacher & Co.
Pegasystems Inc. (NASDAQ: PEGA) Cut to Hold at Canaccord Genuity.
SeaCube Container Leasing Limited (NYSE: BOX) reiterated Buy as Value at Zacks.
Sealed Air Corporation (NYSE: SEE) Raised to Overweight at Barclays.
Suncor Energy Inc. (NYSE: SU) named as Bull of the Day at Zacks.
Tesoro Corporation (NYSE: TSO) Cut to Underperform at BofA/ML.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

A recent report from Cisco Systems Inc. has some astounding predictions, including one that global Internet traffic will rise 4-fold from 2010 to 2015, a compound annual growth rate of 32%.  In four years, internet traffic will be the equivalent of 204,100,000 people streaming Internet HD video simultaneously, all day, every day.   The report expects that there will be 15 billion network-connected devices in the world, twice the world’s population.  Those estimates, however, may prove to be conservative since  much of the growth is taking place  in fast-growing emerging economies such as  China and India.  America’s compound annual growth rate in Internet traffic of 26% pales in comparison to the countries on the 24/7 Wall St. list.  There are more than 230 million in the U.S.  That number is only expected to increase 2% by 2015.   Many commentators such as Strategy Analytics have lamented the poor performance of the U.S. compared with other countries in terms of broadband adoption and download speeds.  ” The United States, despite claiming a vibrant and growing broadband market, still falls shy of the top twenty in the 2010 survey,” the research firm says in its Global Broadband Scorecard: 2010Broadband Composite Index (BCI) Rankings.  “In fact, the US dropped three slots in our penetration rankings compared to our last update.”

• Read The Ten Countries Where Internet Use Will Explode

Interestingly, one area that won’t experience significant growth is peer-to-peer (P2P) file sharing services such as BitTorrent.   Consumer VOIP (voice over IP demand) is expected to see a CAGR of 4%. Traffic from wireless devices will exceed traffic from wired devices by 2015, according to Cisco.

“P2P traffic, still the largest share of Internet traffic today, will decrease as a percentage of overall Internet traffic,” according to the report. “Internet video streaming and downloads are beginning to take a larger share of bandwidth, and together with Internet video calling will grow to over 60 percent of all consumer Internet traffic in 2015.”

The biggest opportunity for Internet growth, though, may lie in the Middle East and Africa, which Cisco expects will increase by 52%.  Business IP traffic in the Middle East and Africa will grow at a compound annual growth rate  of 30%,  faster than the global average of 24%.   Africa’s population, which is about 1 million now, is expected to double by 2050, according to the United Nations.  Experts are expecting broadband demand will rise at a CAGR  of more than 20% for the next few years.    The population in the Middle East doubled between 1976 and 2005, creating one of the reasons for the current unrest in the region.  The region’s population is forecast to rise 54% to 437 million by 2050 from 2010.

China already had  more than 457 million Internet users at the end of 2010, more than the combined populations of the United States, Canada and Mexico.  Growth there will continue to explode, however, thanks to the growth of mobile devices.  China Unicom,  China’s second-largest carrier, recently announced that it was developing its own mobile operating system.  The People’s Daily Recently reported that the company will “help push forward the digitization in southwestern Sichuan Province” over the next few years, which was the location of a devastating earthquake a few years ago.  Since the disaster, China Unicom has invested $308 million in Sichuan.

Internet and wireless growth in India, the second most populous nation, has exploded over the past few years.   In the most recent quarter, the number of wireless customers increased 9.38% over the previous quarter to 687.7 million, according to regulator Trai.  To its credit,  Trai recognizes that penetration rates are low and is encouraging the government to adopt policies to encourage greater broadband use.    Even so, there may be  500 million broadband users by 2012, bigger than the U.S. population, which is about 307 million.

Other counties on the 24/7 Wall St. list are seeing surging demand for wireless spectrum.  The Australian government has come under criticism for its spectrum management policy.  As the Sydney Morning Herald noted, many Australians “own multiple SIM cards for phones, broadband … and iPad tablets.”   That is also the case in Latin America.  Mexican billionaire Carlos Slim said earlier this year that he was planning to invest  $1.5 billion over the next two years in Argentina’s telecommunications sector.   MVS Communications and Clearwire Corp. recently announced plans to develop a $1 billion 4G network in Mexico.   Brazil is attracting attention from foreign investors, including Google Inc. (NASDAQ: GOOG), because of surging Internet use there.   The government in Brasilia recently announced plans to invest as much as $633 million  into internet services each year until 2014.

These are The Ten Countries Where Internet Use Will Explode.

The country’s largest mobile carrier, China Mobile Ltd. (NYSE: CHL) claims more than 606 million subscribers. The second largest carrier, China Unicom (Hong Kong) Ltd. (NYSE: CHU) claims 177 million subscribers and China Telecom Corp. Ltd. (NYSE: CHA) is the third largest with more than 103 million subscribers.

Mobile phone carriers in the US have some problems, but nothing like this. The $39 billion offer from AT&T (NYSE: T) for Deutsche Telecom AG’s (OTC: DTEGY) T-Mobile has stirred a hornet’s nest of oppostion from the US’s third largest carrier, Sprint Nextel Corp. (NYSE: S) and some smaller carriers. The second largest US carrier, Verizon Wireless, a joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone Group plc (NASDAQ: VOD), has kept quiet, probably because if the AT&T/T-Mobile deal goes through it will kill off T-Mobile as a low-cost threat to Verizon. The added benefit is that AT&T is going to be distracted for some time with all the hearings and lawsuits surrounding the deal for T-Mobile.

Back in China, the big mobile carriers are getting another lesson in power politics. Earlier this year, a China Mobile executive was formally charged with crimes by the Communist Party’s discipline agency. Other Chinese companies are also getting squeezed by the scandals in the mobile sector.

A company called Myoo Music Entertainment Co. put up about $1.6 million to acquire the right to be China Mobile’s sole provider of music content. China Mobile then changed its mind and selected another company to act as its music provider. Myoo can’t get its money back following an investigation into financial misconduct by a China Mobile manager and the flight of another manager out of China.

Caixin Online notes, “The investment in Myoo was a fraction of the large amount of private money that’s been rushing into the telecom industry in China in recent years.” Here’s the money quote from Caixin:

“By teaming up with a state monopoly and massaging official connections, a private telecom service provider initially may find it easy to overcome technical and policy barriers for doing business. But success often hinges on orders from companies at the mercy of ever-changing government policies and subject to fallout when management troubles, such as a corruption case involving a high-ranking executive, bubble to the surface.”

There have been a succession of irregular accounting stories out of China in the past few months. And there will be more. The corruption story on the mobile operators is not the first of those stories and it won’t be the last.

What makes the corruption story interesting is that the investigations are being conducted by a political body. Either corruption is being viewed as a crime against the political system or its is being seen as a black eye on the free market system as it is developing in China.

Either way, the prosecution of corruption will be uneven, and some companies are likely to escape while others are pummeled. The mobile carriers are not likely to suffer a great deal because they are so large and so central to the country.

Read the quote from Caixin again. It doesn’t apply only to the telecom business. Caveat emptor.

Paul Ausick

Aluminum Corporation of China, or Chinalco, is a holding company and the controlling shareholder in Aluminum Corporation of China Ltd. (NYSE: ACH), or Chalco. Along with China National Offshore Oil Corp. and China Unicom, which respectively control Cnooc Ltd. (NYSE: CEO) and China Unicom (Hong Kong) Ltd. (NYSE: CHU), Chalco has been named as one of 17 state-owned enterprises to have irregularities and other violations in their financial statements to the Chinese government in fiscal year 2009. China’s Xinhua news agency reports that by March of this year 735 irregularities had been corrected and “65 people responsible for the irregularities or violations have been punished.”

The accounting irregularities for the 17 companies included overstatement of assets, profits, and liabilities by $292.4 million, $405 million, and $528 million, respectively. Undercounted assets totaled $446 million, while undercounted profits totaled $185 million, and undercounted liabilities totaled $385 million.

In the case of Chinalco, the problems appear to be violations of Chinese rules more than accounting irregularities. Chinalco included 11 companies in its 2008 financial report that failed to meet profit targets by the end of 2009 and launched or acquired 10 projects for which Chinalco did not have permission from the state. The total investment in the 10 projects topped $1.4 billion in 2008. Chinalco also got slapped for some irregularities in its senior managers’ shareholdings.

The troubles at Chinalco are reasonably small, but they should be the final straw needed to kill speculation about the company’s rumored intention to buy Alcoa, Inc. (NYSE: AA). The truth could be that China just doesn’t want to be embarrassed by another rejection of a bid for a large US firm. And Chinalco probably doesn’t want more scrutiny from the SEC after getting raked over by Chinese regulators.

Running afoul of China’s regulations governing state-owned enterprises is not the only issue. The so-called “Facebook of China,” Renren Inc. (NYSE: RENN) had to correct its financial statements just before its IPO earlier this month. Shares officially opened at $19.50, climbed to $24, and closed the first day’s trading at $18.01. Shares are now trading at around $12. Busted IPO for sure.

Hong-Kong based financial software maker Longtop Financial Technologies Ltd. (NYSE: LFT) lost its CFO, saw its auditing firm resign, and watched the US SEC initiate an investigation of the company’s financial reports. Shares had fallen -25% since the beginning of May before trading was halted last week. Longtop’s CFO was also an independent director and chairman of Renren’s audit committee.

Advanced Battery Technologies, Inc. (NASDAQ: ABAT) and China MediaExpress (OTC: CCME) are both Chinese reverse merger companies. Advanced Battery’s chairman has been accused of selling a key subsidiary to himself without compensating the company. A report by a short-seller has led to a -33% drop in the share price and a bevy of shareholder lawsuits. Advanced Battery makes lithium-ion batteries for electric vehicles, including its own line of motorbikes and scooters. China MediaExpress, the billboard company, saw its share price fall from near $20 to around $1.50 following a short-seller’s report regarding reporting irregularities.

China Shen Zhou Mining & Resources, Inc. (AMEX: SHZ) is one of China’s leading miners of rare earth minerals and other metals. If any company should be making money, this is one. But the company’s auditing firm issued a “going concern” note to China Shen Zhou’s 2010 10-K. The auditors apparently don’t agree that a private placement of $20 million in common stock and another $7.2 million in warrants is enough to keep the company going for all of 2011. China Shen Zhou’s stock peaked at $10.84/share in January, and trades at about $4.10 today.

While each of these companies may exemplify a different aspect of what’s going on with Chinese firms, they all have one thing in common: they’re Chinese. That is, they must operate under the constraints of Chinese regulations, which are a little hard to pin down at times. The major problem that firms face is that the Chinese government has given inflation fighting a pre-eminent position in its policy making. Higher interest rates, lower lending limits, and reduced liquidity make profitability uncertain.

There are also, apparently, more than a few executives willing to cut corners in pursuit of riches. Accounting rules in China are different from US SEC GAAP accounting rules, and taking advantage of those differences leads to different numbers on both Chinese and US reports, which leads to reports from short-sellers who smell blood in the water, and eventually to government investigations on both sides of the Pacific.

Finally, it’s also worth noting that China faces a serious real estate bubble and that many well-known investors are counseling short positions on Chinese real estate. But real estate, like copper, can be used by China’s small- and medium-sized firms as collateral for low-cost loans while the country’s banks are prohibited from making more loans.

China wants to grow its economy by about 8% annually in an effort to keep up with population growth, rising wages, and large numbers of retirees. To date the country’s exports, wild lending, and government funding have pushed GDP growth above 10% for a number of years. Ratcheting back to 8% means cooling the economy, as the government has done.

The problem is that the constant accelerate/brake pattern is hard to control. China essentially has no choice but to keep the shell game going. If it stops, no one will know for sure where the pea is. 

We have a saying here at 24/7 Wall St.: KNOW WHAT YOU ARE INVESTING IN!  It is getting hard to trust anything out of China at the moment.  Maybe trusting Chinese accounting is becoming the same as trusting that Chinese vitamins are even half of what they are supposed to be.  Welcome to the World of Knock-Off Accounting.

Paul Ausick

Regulators indicated banks may face large write-offs on mortgages. (Reuters)

Demand for the Chevy Volt has risen quickly. (Reuters)

Toyota (NYSE: TM) expected higher US sales in 2011.(Reuters)

China says it will keep inflation low. (Reuters)

Mazda will say Ford (NYSE: F) is no longer its top shareholder. (Reuters)

The Nikkei topped 10,000 for the first time in months. (Reuters)

Twitter may raise capital but claims to have large amounts of cash already. (Reuters)

News Corp (NYSE: :NWS) says it will soon have a tablet publication application. (Reuters)

China Unicom (NYSE: CHU) will launch its own branded phones. (Reuters)

Barnes & Noble (NYSE: BKS) approved a new takeover provision. (Reuters)

The US Agricultural Secretary said food prices will not surge. (WSJ)

California had little interest in its new bond issue. (WSJ)

Cerberus has made a large sum of money through the purchase of distressed mortgage-related paper. (WSJ)

A EU plan to help Ireland is nearly done. (WSJ)

The Fed will make large banks take stress tests before they can offer dividends. (WSJ)

Large jewelry chains have started to feel the effect of higher gold. (WSJ)

Google (NASDAQ: GOOG) has moved into the fashion e-commerce business. (WSJ)

US CPI rose the least in decades.(WSJ)

Americans are skeptical about a White House panel to plan to cut the deficit. (WSJ)

Bernanke took his QE2 case to Senators. (WSJ)

A Chinese telecom firm too a large amount of global internet traffic for a brief period. (WSJ)

Merck’s (NYSE: MRK) cholesterol drug anacetribib, passed a number of worldwide tests. (WSJ)

Rolls Royce will replace 40 jet engines. (WSJ)

Verizon Wireless may charge fees based on the speed of customer wireless connection speed. (WSJ)

Target (NYSE: TGT) said it expects good holiday sales. (WSJ)

The FDA  will ban drinks with a mix of alcohol and caffeine. (WSJ)

The use of old data has hurt muni sales. (WSJ)

Goldman Sachs Group (NYSE: GS) appointed 110 new partners. (WSJ)

The panel which was formed to review the financial crisis will delay its report–a possible sign of disagreement among members. (Reuters)

Chrysler has fallen behind Ford Motor (NYSE: F) and GM in its effort to revive itself. (NYT)

A return to national currencies among eurozone members could be harmful to their economies. (NYT)

State involvement in the mortgage mess may delay an improvement (NYT)

More viewers have dropped cable in favor of internet TV. (FT)

Singapore says its economy could rise 6% next year. (Bloomberg)

Norway banks have the lowest default risk of any in the world according to data provider CMA. (Bloomberg)

The IMF says asset deflation in Hong Kong could hurt its economy. (Bloomberg)

Douglas A. McIntyre