20160517-高盛-Dissecting_Apple’s_shortfall_in_China_in_C1Q_and_a_look_ahead_14页_928kb

Apple's Performance in China: Analysis and Outlook

Core Content

Apple's performance in China has become a critical concern for investors, particularly after it contributed significantly to the year-over-year (yoy) sales decline in the first quarter (F1Q) of 2016. This report analyzes the reasons behind the decline and offers insights into future prospects.

Main Points and Key Information

What's Changed

• Investor Concerns: Apple's performance in China has become a top concern for investors and the company itself, highlighted by CEO Tim Cook's visit and a $1bn investment in Didi.
• Factors Affecting China Sales: The decline in China sales is attributed to structural, cyclical, competitive, and geopolitical factors.

Implications

• Hong Kong Tourism Decline: The number of mainland China tourists to Hong Kong fell by 15% in the March quarter, due to the appreciation of the HKD (pegged to USD) and visa restrictions. There is a 95% correlation between the decline in iPhone shipments in Hong Kong and the decline in mainland tourists.
• Mainland China Sales Decline: iPhone shipments in mainland China fell by 12% yoy, despite a 40% increase in switchers from Android. This suggests the decline was due to lower upgrade rates rather than a shift away from the iPhone.
• Carrier Shifts: China Mobile's net adds declined by 13% yoy, while China Unicom and China Telecom saw significant growth, leading to a shift in consumer preferences towards local brands like OPPO and Vivo.
• New Risk: China banned iTunes Movies and iBooks, which could affect Apple's ecosystem and competitive advantage. Tim Cook expressed optimism about resuming these services soon.
• Strategic Investment in Didi: Apple's $1bn investment in Didi is viewed as a strategic move to enhance its presence in China and potentially integrate with services like Apple Pay, and to support its autonomous driving initiatives.

Valuation

• Price Target: The 12-month price target is maintained at $136, based on a 12.5X CY17E EPS.
• Key Financial Metrics:
  • Current price: $93.88
  • Net margin: 21.2%
  • Debt/total capital: 38.8%
  • 12-month price target: $136.00
  • EPS: $8.40 (9/16E)
  • P/E: 11.2 (9/16E)
  • EV/EBITDA: 5.2 (9/16E)

Key Risks

• Product Cycle Execution: The success of the iPhone 7 and future product launches is crucial.
• End Demand: Consumer demand for Apple products in China.
• Competition: Intensifying competition from local brands like Huawei, OPPO, and Vivo.
• Pace of Innovation: Apple's ability to innovate and maintain its competitive edge.

Investment Profile

• Growth: Expected to be moderate with a decline in the March quarter.
• Returns: Return on Capital is expected to remain strong.
• Multiple: Valuation ratios are expected to remain in line with the peer group.
• Volatility: Measured as trailing twelve-month volatility adjusted for dividends.

Financial Statements

• Revenue and Profitability: Revenue is expected to decline in the March quarter, with a notable drop in EBIT and EPS.
• Cash Flow: Free cash flow per share is expected to fluctuate, with a decline in the March quarter.
• Balance Sheet: Apple has a substantial amount of cash and is managing its debt effectively.

Outlook

• iPhone 7 Focus: The success of the iPhone 7 is crucial for Apple's near-term performance in China.
• iTunes Services: The resumption of iTunes Movies and iBooks in China is a key watchpoint for Apple's ecosystem and competitive advantage.
• Long-Term Strategic Moves: The investment in Didi is seen as a long-term positive, enhancing Apple's presence and potential for growth in China.

Analyst Contributors

• Simona Jankowski, CFA
• Matthew Cabral
• Balaji Krishnamurthy, CFA
• Connie Qian
• Swapnil Sheth

Summary

Apple's performance in China has significantly impacted its overall sales, with the March quarter results showing a 26% yoy decline. The decline is attributed to a drop in mainland China tourists to Hong Kong, lower iPhone upgrade rates, and a shift in consumer preferences towards local brands. The company is taking strategic steps, such as investing in Didi, to strengthen its position in the market. The resumption of iTunes services in China is also a critical factor to watch. Despite these challenges, Apple remains the leader in the premium smartphone market, though its market share has decreased slightly. The report highlights the importance of monitoring these factors to assess Apple's future performance in China.