Daniel Eran DilgerThe report summarized Morgan Stanley's "increasing confidence in our bull case" by noting that "despite steady upturn since February 2009, we continue to believe investors underappreciate the AAPL growth story, which is driven by one, iPhone market share gains and expanded distribution; two, the iPad market opportunity; three, rising enterprise adoption, and four, the Chinese consumer."
Apple's "aspirational brand" in China
In the report coauthored with Mathew Schneider, Huberty stated, "we see 27% incremental revenue and 44% operating income potential in 2012," based on a variety factors including "China strategist Jerry Lou's view that China is undergoing a 'megatransition' from being the leading producer of goods to the leading consumer of them."
Morgan Stanley also cited "evidence of strong uptake of Apple products among higher-income China consumers from our November 2009 AlphaWise survey," along with recent success demonstrated by BMW, "which we see as a template for Apple's growth. If our numbers are right, Apple then would have to grow revenue by just 19% and operating income by 11% in the rest of the world - a marked deceleration from LTM 43%/37% ex-Asia growth - to hit the current consensus two-year EPS growth forecast of 21% (and our 22%)."
The report also noted that China's "baby boomers" are increasing consumption. "Jerry Lou believes this segment, which will be over half the Chinese population in 2015, will continue to trade up to higher-priced 'aspirational brands.' We expect AAPL to be a key beneficiary of this trend."
The report notes that Apple's brand is "already preferred by urban Chinese: Our Nov '09 survey of Chinese handset users in tier 1 / 2 cities suggests Apple already has greater mindshare among higher-income China consumers than in the US. This population is 3x as likely to own a Mac, 1.7x as likely to own an iPod, and 1.8x as likely to own a Smartphone."
The report added that "Apple held 5% market share of handsets [in China] at the time of the survey, but 31% of surveyed consumers said they’d consider Apple for their next handset purchase, higher than any other brand."
Apple targeting China with large retail expansion
Huberty also wrote that Apple was "on a trajectory similar to BMW China," describing both as 'aspirational brands," that are expanding distribution in China. "Despite the lack of financing and overall lower average income, China will account for 11% of BMW revenue and 17% of OpInc this year, according to our European auto analyst Stuart Pearson, due to a 4x increase in dealers over the past five years. Apple is making similar investments in distribution and is on track to hit similar contribution rates by FY12, in our view."
Apple has significant retail expansion plans in China, with publicly announced intentions to add 21 new stores in China by the end of 2012. The company currently has four; two stores in both Beijing and Shanghai. Apple is reportedly working to open a third store in both cities as well as a new store in Hong Kong.
The company said it intends to open 40 to 50 new retail stores in 2011, making its plans in China roughly 25% of the company's global retail expansion. About half of Apple's new retail stores are expected to open in the US.
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20 Comments
any of the stock market savvy guys here want to chime in as to if this is a valid statement?
$500, that sounds like a whole lot.
I've been going to China on business trips since '93 and still go there every 2~3 months. I also visit Korea regularly and the iPhone mania amongst the affluent and the growing upper middle class is only just getting started. And Far East Asians are even more brand conscious than the people in the West. They want American or European brands like Apple, BMW, Mercedes, Audi, Tiffany, Giorgio Armani, Chanel, Louis Vuitton, Rolex, etc. They absolutely lust after this stuff.
On my most recent trip to Hong Kong and China in Sep, I saw iPhones and iPads everywhere. And these were probably ones bought in the US or elsewhere since the official distribution of these products in China is only now getting started. Most of the iPhones I see in China are still the 3G and the 3GS variety that traveling business people bought from overseas, but you visit any factory and you'll see a lot of executives and upper level managers with one. While I was waiting in an airport in Xiamen to fly to Beijing, I saw at least a dozen iPads.
Of course, we're probably only talking about 5% of the population at this point in time, but that's still 70 million people. And the affluent consumers of that upper tier don't want Asian brands - especially Chinese, Taiwanese or Korean brands (they are more partial to Japanese brands) - so Samsung, LG, and HTC aren't very "aspirational" or desirable over there. Apple is also becoming huge in Korea with the iPhone despite Samsung's all-out effort to defend their home turf with their silly "be-patriotic-and-buy-Korean" marketing campaign. Apple has already sold well over a million iPhones since its introduction to the Korean market about a year ago and the iPhone 4 is only starting to ship there in very limited quantities with a huge backlog. I have relatives and friends in Korea who are just itching to get their hands on the iPhone and the iPad.
You can be assured the same will happen in other emerging markets such as India (nearly 1.2 billion in population and soon to overtake China) and Indonesia (nearly 300 million people). The upper class will want Apple, not Samsung, not LG, not Sony/Ericsson, not Motorola and not Nokia, even though Nokia is huge in Asia as a feature phone. As a Korean-American who grew up in Korea and has traveled extensively throughout Asia (especially China), I can tell you that they love what are perceived to be high-end American/European brands. I have to admit it's rather silly, but hey, that's just the reality over there and that only points to an even brighter future for Apple. Asia is going to be a major market for Apple over the next decade and it'll be the ones with the money (and the number of these people is growing exponentially) buying up iPhones and iPads.
$500, that sounds like a whole lot.
Sure, it's a lot, but AAPL is trading at a reasonable premium to its earnings. Compare it to AMZN or Netflix and the present $300 seems cheap. Apple's growth potential in the US remains huge, and China's market represents several times the growth potential of the US market. Then there's India (see above post).
I have no use for analysts, but Morgan Stanley's report doesn't seem to contain much to disagree with.
Consider all you know about the the company, its products, their market, their future plans (that we know about), the US dollar and what's likely to happen with it, and the overall economic and business climate. Then, consider Apple's future plans that we don't know about. Consider one in every five computers sold today is a Mac. Look around and see that even people who don't appear particularly wealthy all seem to have an iPhone. Finally, ask yourself what's most likely a year from now: AAPL $200, $300, $400...?
Then, decide for yourself.
I don't know much about China (other than it is a huge market along with India) but I know that Apple is not an expensive stock at its current price of $300. The P/E ratio, which is what a lot of people use to determine if a stock is expensive, is only at 21. This isn't bad. For example, this makes Apple a cheaper stock than Amazon which has a P/E of 65. Apple is also cheaper than Netflix with a P/E of 63 and a bit cheaper than Google at 24. The stock has had a recent run from 250 to 300. One reason why the stock hasn't gone higher is because Apple is the second biggest company next to Exxon/Mobil. A lot of people don't think that a company that big can have much growth left. I don't think that is true with Apple. We are just at the beginning of a very successful product cycle for the iPad. The iPad was recently touted as the best selling electronic gadget ever. They opened a new category. The iPhone continues to sell really well. These will both help sell more Macs. The margins that Apple gets on their products are really high. Although these will decline slightly over time. Now, Google is a big threat but I think there is plenty of room for two players in this field. Whoever comes in second place will still be making a lot of money.
A year from now it would not be unrealistic to have Apple stock sitting at $375. It would also not be a big surprise if it is substantially higher than that. Apple did just have its first $20 billion quarter ever.
Forget the price forecast. That's the least important part.
The underlying analysis about the growth potential for 'aspirational brands' in China (and, I believe, followed a few years later by India) is spot on.
Investors ignoring these two countries do so at the risk of considerable future regret!
(Add: I agree wholeheartedly with alexkhan2000's analysis. Didn't read that before I posted.)