[ad_1]
By K C Ma and Bilal Hashmi
Apple (NASDAQ: AAPL) has long been spared by the tariff impact. It is the only technology company to have benefited from the blessing of the White House to be exempted from US tariffs on imports from China. The Apple Watch and AirPods were not included in the list of products that were originally expected to be subject to 25% import duties. The New York Times noted that they figured among 300 product lines removed from a previous project. Smart watches, Bluetooth devices, bike helmets, plastic gloves, high chairs, game pens and some chemicals are among the abandoned items. Only until the infamous downward guidance of Tim Cook was confirmed by the absence of "discount on rates" in the price of his action, which is clearly demonstrated by the close relationship between the real price of this action and its core values. fair value (Chart 2). Although the above optimism only lasts until the end of 2018.
After the breakdown of trade negotiations and the return of tariffs, Huawei's further ban by the United States opened the door for China's ban on retaliation against a US company of importance. similar. The market was finally forced to consider the "unthinkable" idea that China could ban the sale of iPhone by Apple in response. That's Bala Reddy from Goldman Sachs who wrote the first one:
"If there was a ban or other restriction on Apple products in mainland China, we estimate that Apple's total annual exposure to its BPA is about 3.35 dollars per share. "
However, Reddy has not mentioned the likelihood of such a ban and has only reduced its 12-month price target from $ 184 to $ 178 with a 14.7x term PE.
In this article, we also examined the impact of Apple's revenue on revenue and share price of a possible ban on the iPhone in China because the slowdown in sales of Apple's iPhone had started well before the commercial conflict. The sheer size of Apple's iPhone revenue exposure in China, with or without the threat of a ban, makes this income a more critical factor for shareholders' equity. 39; Apple.
Chinese challenges of Apple before Huawei's ban
Smartphone shipments to China decreased 11 percent year-on-year, from 121.3 million units in the fourth quarter of 2017 to 107.9 million units in the fourth quarter of 2018. The Chinese smartphone is in recession and down for five quarters. It has long suffered from longer replacement cycles and low consumer spending as a result of the uncertainties of the trade war. For Apple, due to the patent battles with Qualcomm (NASDAQ: QCOM) and high prices, iPhone shipments have dropped 22% a year in 2018, and this figure has now dropped by one year to each other for 8 of the last 12 quarters. Apple currently ranks fourth among the top five smartphone manufacturers, with a 10% market share in China in the fourth quarter of 2018.
After the ban Huawei: how many iPhone in China are in danger?
To estimate the impact of a possible ban on the Chinese iPhone for Apple, I must first estimate the iPhone units currently sold in China. During its fourth-quarter tax call, Apple announced it would stop reporting unit sales for iPhone, iPad and Mac. Apple's chief financial officer, Luca Maestri, said that "the number of units sold during a quarter is not representative of the underlying condition of the business." In a way, choosing not to publish iPhone numbers would only slow the unit sales growth of its flagship product. Since Apple has never reported shipping units for geographic segments, we need to rely on Canalys' and IDC's estimated inventory of distribution channels. For the second quarter of the year, Apple delivered approximately 6.975 million iPhones, or 23% of all iPhones delivered, 46% less than a year ago or 59% sequentially (Figure 1A). ). This is its worst drop in two years. In fact, he sold fewer smartphones in China than Xiaomi (XI), Vivo, Oppo and Huawei. In terms of revenue, Apple's revenue of $ 8.8 billion for the second quarter of the fiscal year in China was down x% sequentially and by x% a year ago ( Figure 1B).
Since the fall of the second quarter was earlier than Huawei's ban, the reasons most often cited are the growing nationalism and the slowdown in China, resulting from trade disputes between the United States and China. It is clear that the drop in shipments of iPhone units in China 2Q was more of a problem in China, as shown by the record of 23% unit shares in China. Similarly, if China responds with the ban on the iPhone, immediate losses will reach nearly $ 49.4 billion in revenue a year (the last four quarters of Figure 1B ), accounting for 18.6% of Apple 's total business figure.
From the ban of iPhone to the stock losses
The easy task is to identify income exposure as it is recorded. However, the most elusive is to convert income changes into stock price movements. For this, I rely on an equity valuation model that links the company's revenues to the stock price, because it is the turnover of the iPhone in China for Apple. If a stock is valued on the basis of its price relative to its multiple, the percentage change in the stock price may be approximated by the percentage change in income and the percentage change in the price of sales:
% change in stock price =% change in turnover +% change in P / S
Since the P / S multiple is dependent on future revenue growth, the percentage change in the P / S must first be estimated with the expected change in revenue growth. For Apple, Figure 2A illustrates a positively correlated relationship positively between the P / S ratio and the growth rate of the turnover. Specifically, for every 1% change in Apple's revenue growth rate, the P / S ratio will change by .03.
To show how to use the valuation model, for example, if Apple's revenue growth is expected to increase by 10% and the P / S ratio will also increase by 9% due to correlation, the stock price will rise. 19% in total. . In the case of Apple, if China does not ban iPhones, the current nationalism would cost between 3% and 5% of Apple's revenue for the next 12 months. As a result, Apple's stock appears to be losing 6% (Table 1). If China decides to ban the iPhone, Apple is likely to lose $ 50 billion (-18.6%) of its total business turnover with the loss of nearly $ 43 million in sales. # 39; iPhone units a year in China, adding the associated loss P / S (-10.63%), Apple's stock is expected to decline by 30% (Table 1).
The chance of the ban on the iPhone in China
Thus, between Chinese nationalism and the ban on the iPhone, Apple's action could lose between 6% and 30%. But the stock price and the new target price of analysts have only dropped by less than $ 10, or about 5%, since Huawei's ban. The fact that share prices have not fully reflected the extent of potential revenue losses seems to suggest hope. The market may have seen through the reality that China will not jeopardize the local growth of employment and the local economy provided by the same Apple that they want to ban. The market may have seen through the complexity of international trade that the announced ban or embargo can be easily "mitigated" by companies as have the tariffs. Or, the market may have seen through the complexity of trade negotiations that Huawei's "surgical" ban can be quickly lifted as soon as it is introduced. Less than a week after the ban, Reuters reported,
"The United States has" temporarily delayed "the trade restrictions imposed on the Chinese company Huawei to minimize disruption to its customers, a decision that the founder of the world's largest telecommunications equipment manufacturer did not want to say big because he was already ready to act.
Finally, the sign of mental health may have already surfaced. At the end of April, before Trump's ban on Huawei, Apple announced slightly better iPhone sales in China. CEO Tim Cook told analysts at a conference call:
"There is an improved trade dialogue between the United States and China and, from our perspective, this has affected consumer confidence on the ground, there is a positive way to do it."
Disclosure: I / we have / we have no position in the actions mentioned, and we do not intend to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
[ad_2]
Source link