By K C Ma and Bilal Hashmi
For a long time, Apple (NASDAQ: AAPL) has been spared from the tariff impact. It has been the only technology company that received the White House's blessing to be exempt from US tariffs on Chinese imports. Both Apple Watch and AirPods have been turned off the list of products that were originally subject to 25% import tariffs. The New York Times noted that they were among 300 product lines removed from a previous draft. Among the things lost are clear watches, Bluetooth devices, bicycle helmets, plastic gloves, high chairs, play blocks and certain chemicals. Not before Tim Cook's infamous down-turn, Apple's lack of immediate ceiling risk has been confirmed by the lack of "discount rate" in the share price, as evidenced by the close relationship between Apple's actual share price and its basic single fair value (Figure 2). Although the above optimism lasts only until the end of 2018. After the talks in the talks and tariffs were restored, the US's further ban on Huawei opened the door to China's imprisonment against a US company of similar importance. The market was finally forced to entertain the "unthinkable" notion that China could ban Apple iPhone sales as a response. It was Goldman Sachs & # 39; Bala Reddy who first wrote,
"If there was a ban or any other restriction on Apple products in mainland China, we estimate that Apple's annual total EPS exposure is around $ 3, 35 per share. "
However, Reddy did not mention the likelihood of such a ban and just trimmed his 12 month price target to $ 178 from $ 184 with a forward PE of 14.7x.
Alternatively, in this post, we investigated Apple's revenue effect and stock price impact from a potential China iPhone ban because Apple's decline in iPhone sales has started long before the trade damage. The large size of Apple's China iPhone revenue exposure, with or without the threat of a ban, makes sales a more critical factor for Apple shareholders.
Apple's Chinese Challenges Before The Hague's Ban
China's smartphone shipments fell 11% annually from 121.3 million units in Q4 2017 to 107.9 million units in Q4 2018. The Chinese smartphone is in a recession and has declined. last five quarters. It has long suffered from prolonged replacement and weak consumer spending from the trade war uncertainty. For Apple, due to the patent matches with Qualcomm (NASDAQ: QCOM) and high prices, iPhone shipments fell 22% annually in 2018, and it has now fallen on an annual basis for 8 of the last 12 quarters. Currently, Apple is in fourth place of the five major smartphone manufacturers with a 10% market share in China in Q4 2018.
After Huaweis Ban: How Many China iPhones Are In Danger?
To estimate the impact on Apple from a potential China iPhone ban, I must first estimate that today's iPhone units are being sold in China. Apple announced on its 4Q fiscal revenue call that it will stop reporting device sales for the iPhone, iPad, and Mac. Apple Finance Director Luca Maestri said "the number of units sold in one quarter is not representative of the underlying business." In this way, it means that you choose not to release iPhone numbers, only lead to lower sales volume in the product's flagship. As Apple never reported unit shipments for geographic segments, we must rely on estimated channel stocks of Canalys and IDC. For tax Q2, Apple sent approx. 6.975 million iPhones, or 23% of the total iPhone sent, which is 46% lower than 1 year ago or 59% in order (Figure 1A). This gives its worst decline in two years. In fact, it sold fewer smartphones in China than Xiaomi (XI), Vivo, Oppo and Huawei. In terms of revenue, Apple's Q2 China fiscal revenue was $ 8.8 billion x% lower in order and x% a year ago. (Figure 1B).
Since the Q2 case was before Huawei's ban, the most cited causes include the raging nationalism and decline in China, both of which are a result of trade disputes between the United States and China. It is clear that the 2Q China iPhone shipping drop was more of a China problem, as shown by record length 23% China iPhone share. Similarly, if China reacts with the iPhone ban, immediate losses will be nearly $ 49.4 billion in revenue annually (last 4 quarters in Figure 1B) or 18.6% of Apple's total revenue.
From iPhone Ban For Stock Losses
The simple task is to identify the income exposure because it is on record. However, it is more difficult to convert sales changes into share price changes. For that, I'm dependent on a stock value model that relates the company's revenue to the stock price, since it's Apple's China iPhone revenue at stake. If a share is valued based on the price of sales, the% change in share price may approximate% of change in turnover and% change in price for sale:
% change in share price =% change in Sales +% change in P / S  Since the P / S multiply depends on future revenue growth, the% change in P / S must first be estimated with the expected change in sales growth. For Apple, Figure 2A illustrates a clearly positive correlation between P / S and revenue growth. Especially for every 1% change in Apple's revenue growth, it will change the P / S ratio by 0.03.
To show how to use the valuation model, for example, if Apple's revenue growth is expected to increase by 10% and P / S will also increase by 9% due to the correlation, the stock price will increase by 19% overall. For Apple's case, if China doesn't ban the iPhone, today's nationalism is estimated to cost 3% to 5% Apple revenue over the next 12 months. As a result, Apple's stock is losing 6% (Table 1). If China decides to ban the iPhone, Apple will probably lose $ 50 billion (-18.6%) of its total revenue for the loss of nearly 43 million iPhone sales a year in China, and add the associated loss on P / S (-10.63%), Apple's stock is expected to fall by 30% (Table 1).
The chances of China's iPhone ban
So, between China's nationalism and the iPhone ban, the Apple file may seem to be losing between 6% and 30%. But the share price and analysts' new target price fell only below $ 10, or about 5%, since the run of Huawei's ban. The fact that stock prices have not fully reflected the scope of potential revenue losses seems to give some glimpse of hope. The market may have seen through reality that China will not risk local employment and economic growth as the same Apple they want to ban. The market may have seen through the international trade's intricacy that the advertised ban or embargo can be easily "softened" by the companies as the tariffs have been. The market may also have seen through the trade negotiations that the "surgical" ban on Huawei can be rapidly reversed as it was introduced. Less than a week after the ban, Reuters reported,
"The United States has temporarily delayed" trade restrictions on China's Huawei to minimize disruption to its customers. A move that the founder of the world's largest telecommunications equipment maker said meant little because it was already prepared for American action. "
Finally, the health sign may have already been discovered. At the end of April, before Trump's Huawei ban, Apple reported slightly better iPhone sales in China. CEO Tim Cook told analysts during a conference call:
" a better trade dialogue between the United States and China, and from our point of view, this has affected consumer confidence on the ground, that is a positive way. " Enlightenment: I / We have no posts in any of the aforementioned shares and none plans to start some positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company if stocks are mentioned in this article.