- Apple has consistently gained smartphone market share in China since the launch of its latest iPhone models.
- The iPhone demand in China will continue to be strong driven by the growth of China’s middle class and rising disposable income.
- In addition, tailwinds from smartphone replacement cycle will drive Apple’s strong performance in China.
China has become a critical piece of the Apple (NASDAQ:AAPL) puzzle. The growing importance of China in Apple’s plans is quite evident now. While local competition from players like Xiaomi could upset Apple’s plans in China, Apple is on the right side of key trends, at a macro as well as industrial level. China’s contribution to Apple revenue, 22% in the latest quarter could see a further rise in the coming quarters.
Major Macro Trends Provide Tailwinds For Apple
As mentioned in our earlier post on Apple, the Cupertino based giant will be a beneficiary of three macro trends of China’s growing middle class, rising disposable incomes and increasing preference for Apple products among Chinese gifters.
Private Consumption Spending On Rise
China’s middle class has grown at explosive rate, up 4% of total population in 2000 to 68 % in 2012. The Chinese middle class growth is far from over, projected to hit 75% of total population in 2022. More importantly, the Chinese private consumption spends are projected to grow at an average annual growth rate of 10% up to 2022, driven by a strong growth in the Chinese middle class.
Rising Disposable Income Driving Private Consumption
The growth of private consumption is driven by a steady rise in Chinese disposable income, as more and more Chinese families move into the upper middle class.
Apple Products, The Gifts Of Choice
A third trend favoring Apple has been the preference for Apple products among Chinese gifters. As per a research report from Hurun research, Apple products were the gifts of choice among China’s richest. This is a key trend and could also serve as a hedge of sorts from slowing growth in the smartphone space, as close to 75% of Chinese mobile phone population currently use smartphones.
Industry Level Trends Favoring Apple
Apple will also enjoy benefits of key industrial trends which could help Apple ramp up its Chinese operations riding these trends.
China’s Saturating Smartphone Market
The Chinese smartphone market could be nearing saturation as a large proportion of China’s mobile population already use smartphones. According to IDC, smartphones account for over 80% of Chinese mobile phone users. The high penetration level of smartphones among mobile phone users holds two implications:
- Lower long term growth potential in the Chinese smartphone space as further penetration will be increasingly difficult. Secondly, there are a large number of android OEM’s already competing at the lower price ranges with little to differentiate between them.
- A large part of future growth in Chinese smartphone sales will be driven by buyers looking for a smartphone replacement, rather than first time smartphone owners.
Apple to Capitalize on Chinese Smartphone Replacement Cycle
Apple, with its higher priced (and now large screened) smartphones is well positioned to cash in on the Chinese smartphone demand driven by the replacement cycle, as second time smartphone buyers are more likely to buy higher end smartphones as compared to first time buyers.
In conclusion, Apple is right on the money with its larger screen iPhones as China’s growing middle class provides key macro tailwinds at a time when Apple could reap the benefits of smartphone replacement cycle in China. The huge revenue potential of the iPhone, Apple’s profit margins and significantly large cash flows make Apple an attractive stock to buy. This is also reflected in our bullish Apple stock analysis.