The Headwinds Apple Now Faces In China

In a report published Thursday, BofA Merrill Lynch analyst Wamsi Mohan maintained a Neutral rating on Apple Inc. AAPL, with a price objective of $130, saying that “affordability” played a critical role in determining the iPhone addressable market.

Although China’s population is estimated to grow to about 1.4bn this year, the percentage of that population who can afford an iPhone is significantly smaller. Analyst Wamsi Mohan said that the “real TAM” in China would comprise of people in the age group of 15-54 years, residing in the urban areas and who belonged to households having disposable income of more than RMB60,000 per year.

In the report BofA Merrill Lynch noted, “We project this target market to grow to 272mn by 2020 from 212mn in 2015. However, many of these will be part of annual upgrades from the installed base…Our analysis suggests that the incremental iPhones sold annually in China to replicate North America levels of penetration will at best lead to an incremental 10mn iPhones sold in China (Bull case) to flat (Bear case).”

Mohan pointed out that the recent devaluation of the Yuan against the USD would hurt Apple’s sales. He cited the following reasons:

• The devaluation made iPhones more expensive in China
• Apple’s revenues would be lower on translation
• Greater currency and demand headwinds.

“Assuming no impact to demand and no impact from hedging, we estimate a 4% move in the Yuan lower could hurt earnings by $0.06. This assumes 15% rev exposure to China. Most of the margin benefit from the move in the RMB will reside with the iPhone assemblers,” Mohan added.