Sterne Agee’s Shaw Wu this morning reiterates a Buy rating on Apple (AAPL) shares and a $500 price target, writing that “a frequent question we have gotten from investors recently is what are we hearing in terms of progress with China Mobile and the iPhone.”

Wu explains that many customers on the network of China Mobile (CHL), which doesn’t officially carry the iPhone but has 10 million subscribers using it anyway, are simply running the device on WiFi or on the older 2G frequency because the iPhone doesn’t yet support China Mobile’s flavor of 3G wireless, the so-called TD-SCDMA.

Despite no official deal, our understanding is that AAPL and China Mobile remain firmly engaged. Our industry sources indicate iPhone prototypes using TD-SCDMA chip sets have been under beta test for some time. But because of the success of iPhone at China Unicom (official carrier partner) and China Mobile (using Wi-Fi), not to mention Greater China including Taiwan and Hong Kong, AAPL is apparently in no rush to produce such a model and may not do so at all. Instead, effort is being focused on developing 4G TD-LTE models.

But the actual sticking point between the companies may be that China Mobile wants some App Store revenue:

our industry sources indicate that one of the reasons why there isn’t an official deal between China Mobile and AAPL is over App Store economics. Today, AAPL does not share revenue with carriers, which has been a source of tension but also accepted. Mobile apps are becoming a very big deal in China and it is understandable why China Mobile wants a bigger piece of the action. We need to see how this plays out but what may help AAPL ironically is the lack of a carrier cut and is one of the key reasons why iOS developers make money while others don’t.

Apple shares today are up $4.97, or 1.2%, at $404.70. China Mobile shares are down 10 cents at $48.52.