20160517-高盛-Dissecting_Apple_s_shortfall_in_China_in_C1Q_and_a_look_ahead_13页_408kb

Apple Inc. (AAPL) Company Update Summary

Core Content and Key Insights

Apple Inc. (AAPL) faced a significant sales decline in the Greater China region during the first quarter of 2016 (C1Q), which accounted for 25% of its total sales. This decline is a major concern for investors and the company itself, as highlighted by CEO Tim Cook's recent visit to China and a $1 billion investment in Didi, a local ride-hailing service.

Main Factors Behind the Shortfall

1. Decline in Mainland China Tourism to Hong Kong:

   • Mainland China tourist numbers to Hong Kong fell by 15% in the March quarter.
   • This decline was driven by the appreciation of the Hong Kong Dollar (HKD), which is pegged to the USD, and visa restrictions.
   • iPhone shipments in Hong Kong dropped by 65% year-over-year, showing a strong correlation (95%) with the change in mainland tourists.

2. Lower iPhone Upgrade Rates:

   • iPhone shipments in mainland China fell by 12% year-over-year.
   • Despite a 40% increase in switchers from Android to iPhone in the first half of FY16, the decline suggests a lower upgrade rate.
   • This led to a 3 percentage point loss in market share, with local vendors like Huawei, OPPO, and Vivo gaining ground.

3. Shift in Mobile Carrier Customer Base:

   • China Mobile's net adds declined by 13% year-over-year, while China Unicom and China Telecom saw a 990% combined net add growth.
   • China Mobile's customer base is more affluent and early adopters, whereas China Unicom and China Telecom cater to price-sensitive users, leading to a shift in market dynamics.

4. Market Saturation and 4G Adoption:

   • The Chinese smartphone market continued to slow, with overall shipments growing only 8% year-over-year.
   • 4G/LTE shipments accounted for 90% of total handset sales in C1Q16, up from 79% in C1Q15 and 10% in C1Q14, indicating market saturation.
   • Apple is targeting the mass market with the iPhone SE, which is still in high demand in China.

5. Content Ecosystem Restrictions:

   • China banned iTunes Movies and iBooks, which could impact Apple's competitive advantage.
   • The CEO expressed optimism about resuming these services, which is a key factor in Apple's long-term success in the region.

Strategic Moves

• Investment in Didi:
  • Apple's $1 billion investment in Didi is seen as a strategic move to strengthen its presence in China.
  • It supports Apple's broader ecosystem and could aid in autonomous driving development.

Valuation and Investment Outlook

• Price Target:

  • Goldman Sachs maintains a 12-month price target of $136, based on a 12.5X CY17E EPS.

• Current Financials:

  • Price: $93.88
  • 12-month price target: $136.00
  • Market Cap: $520,178.4 million
  • Dividend Yield: 2.3%
  • Net Margin: 21.2%
  • Debt/Total Capital: 38.8%

• Projected Financials:

  • Revenue (mn): 233,715.0 (9/15), 217,222.4 (9/16E), 244,001.9 (9/17E), 256,558.6 (9/18E)
  • EPS (pre-except): 9.22 (9/16E), 10.53 (9/17E), 11.42 (9/18E)
  • P/E (X): 12.9 (9/15), 11.2 (9/16E), 8.9 (9/17E), 8.2 (9/18E)
  • EV/EBITDA (X): 6.6 (9/15), 5.2 (9/16E), 3.9 (9/17E), 3.3 (9/18E)

• Key Risks:

  • Product cycle execution
  • End demand
  • Competition
  • Pace of innovation

Investment Profile

• Growth:

  • Sales Growth: 27.9% (9/15), -7.1% (9/16E), 12.3% (9/17E), 5.1% (9/18E)
  • EBITDA Growth: 36.5% (9/15), -13.6% (9/16E), 17.3% (9/17E), 4.6% (9/18E)
  • Net Income Growth: 35.1% (9/15), -13.7% (9/16E), 19.1% (9/17E), 3.8% (9/18E)

• Margins:

  • Gross Margin: 40.1% (9/15), 39.2% (9/16E), 39.8% (9/17E), 39.3% (9/18E)
  • EBITDA Margin: 35.3% (9/15), 32.8% (9/16E), 34.3% (9/17E), 34.1% (9/18E)
  • EBIT Margin: 30.5% (9/15), 27.9% (9/16E), 29.7% (9/17E), 29.3% (9/18E)

• Other Metrics:

  • Inventory Days: 5.8 (9/15), 6.3 (9/16E), 5.9 (9/17E), 6.2 (9/18E)
  • Receivable Days: 26.8 (9/15), 28.8 (9/16E), 28.4 (9/17E), 29.6 (9/18E)
  • BVPS: $21.35 (9/15), $23.74 (9/16E), $28.36 (9/17E), $34.11 (9/18E)
  • ROA: 20.4% (9/15), 15.5% (9/16E), 17.3% (9/17E), 16.6% (9/18E)
  • CROCI: 37.9% (9/15), 29.4% (9/16E), 29.0% (9/17E), 27.9% (9/18E)
  • Dupont ROE: 44.7% (9/15), 36.6% (9/16E), 38.2% (9/17E), 34.5% (9/18E)
  • Leverage (X): 2.4 (9/15), 2.4 (9/16E), 2.3 (9/17E), 2.1 (9/18E)
  • Free Cash Flow Yield: 10.3% (9/15), 8.7% (9/16E), 12.6% (9/17E), 13.7% (9/18E)

Analyst Contributors

• Simona Jankowski, CFA: simona.jankowski@gs.com
• Matthew Cabral: matthew.cabral@gs.com
• Balaji Krishnamurthy, CFA: balaji.krishnamurthy@gs.com
• Connie Qian: connie.qian@gs.com
• Swapnil Sheth: swapnil.sheth@gs.com

Investment Lists

• Americas Buy List
• GS SUSTAIN Focus List

Conclusion

Apple's performance in China is influenced by a mix of structural, cyclical, competitive, and geopolitical factors. While the company is still the leader in the premium segment, the shift to lower-end consumers and the impact of the travel decline have contributed to the sales shortfall. The resumption of banned services and strategic investments in local companies like Didi are viewed positively, but the near-term success of the iPhone 7 and the trajectory in China remain key factors for the investment case.