China Growth Trends Support Apple Products In 2013

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) announced that its fourth generation iPad and cellular versions of the iPad have been made available in China. Both products are currently available in more than 100 countries worldwide, including the U.S., Australia, Canada, China, France, Germany, Japan, and the U.K. Below, I will explain how demographic trends in China will favor the growth of fourth generation iPads in the country. Specifically, I will look at the effect of rising median income and the migration of consumers from rural areas to cities. These trends will enable Apple to sell more of these products and improve its price multiples.

Trends Favor Apple In China

It’s all about the ever-growing middle class with disposable income. China is expected to have approximately 1.4 billion middle class consumers by 2030, many of them migrating from the rural areas. The average disposable income of urban Chinese households rose to around $3,000 per capita in 2010. That means a typical family of three earns around $9,000 a year. Added to this, Apple sales in China doubled in 2010 and 2011, and the company has opened up several new retail outlets in the past year, for a total of 11. Apple had 71.42% of China’s tablet sales in the third quarter of 2012, compared 10.52% for Lenovo and 3.53% for Samsung (SSNLF). These latest stats about tablets beginning to take off in China support the idea that the fourth generation and cellular versions of iPad will be successful in China.

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Financials

Due to the popularity of its products, Apple reported net sales of $156.50 billion in its 2012 annual report, up from $108.24 billion in 2011. However, the company reported that net sales in greater China and the Asia-Pacific segment increased $10.7 billion or 47% during 2012 compared to 2011. The growth in net sales during 2012 was mainly due to increased demand for the iPhone from the launch of the iPhone 4S, strong demand for the new iPad and iPad 2, and higher Mac sales.

“In terms of geographic distribution, we saw highest growth in China, and it was into the triple digits,” Apple’s CEO, Tim Cook, said at the conference call announcing Apple’s annual report.

For the quarter that ended March 31, 2012, Apple reported net income of $11.62 billion, or $12.30 a share, compared with $5.99 billion, or $6.40 a share, in the period a year earlier. Apple’s revenue was $39.19 billion, up from $24.67 billion a year ago. However, Mr. Cook said that Apple’s quarterly revenue from China was $7.9 billion, about 20% of total company revenue. Furthermore, that was triple Apple’s China sales in the same period a year ago. In contrast, Apple’s China sales during its last fiscal year were about 12% of total revenue. Two years ago, Apple sales in China were 2%.

Apple’s Initiatives in China

Apple has done a lot in the recent past to guarantee strong sales in China.  Its chief executive officer, Tim Cook, met with China Mobile's Chairman Xi Guohua recently to discuss "matters of cooperation. Currently, Apple has 11 stores in the Greater China region, opening five in 2012, and planning to have 25 in the near future. Apple has signed agreements with China Unicom and China Telecom to sell its iPhones in China. Apple CEO Tim Cook visited the manufacturing site of the company’s biggest vendors, Foxconn in Zhengzhou, China to negotiate the manufacturing of the new generation of the iPhone.

Fourth Generation and Cellular iPad

The iPad mini has a completely new iPad design that is 23% thinner and 53% lighter than the third generation iPad and features a stunning multi-touch display and an incredible 10 hours of battery life.

It is noticeable that the iPads are among the company’s first products shipped to the Chinese market in the new year. The iPad Mini is proving much more popular in China and Hong Kong than its bigger 4th-generation brother, and gaining a head start early in the year over its rivals is good for Apple.

When we relate Apple’s Chinese sales to some of  its recent financial statements, it is clear Apple has been improved in comparison to the previous year. In addition, the costs are really not too up above the mark, so it can be said that the company is operating at an optimum efficient level.

The Competition

With gross margin of 38.63%, compared to 25.26% for Amazon (NASDAQ: AMZN), 24.19%% for Hewlett-Packard (NYSE: HPQ), and 30.44% for Research In Motion (RIMM), and earnings per share of 44.15, compared to 31.91 for Google (GOOG), -6.41 for Hewlett Packard, and -1.67 for Research in Motion, Apple does seem to be well ahead of others. With the fourth generation and cellular iPads shipped to China,  Apple will compete more effectively with Hewlett-Packard’s window 8-powered tablets, Microsoft’s (MSFT) Surface, Nokia’s (NOK) RT Tablets, Research In Motion’s Blackberry tablets, Amazon’s Kindle Fire, and Google’s Nexus 7. 

Amazon released its fourth quarter 2012 earnings, and missed expectations on both revenue and profit. In the third quarter of 2012, the company reported a loss of $274 million ($0.60 a share) from a profit of $63 million ($0.14) in 2011, missing analyst expectations. Revenue jumped 26.9% to $13.81 billion from $10.88 billion in the third quarter.

Hewlett-Packard was one of the worst performers in 2012. Hewlett-Packard fell from $30 to $11.35 and only partially recovered towards the end of the year with a current price around $17. A lot of attention has been placed on the company's core revenue generator: The Personal System segment. There is also growing pressure from tablets and mobile devices.

Conclusion

Looking at its previous year iPad sales, the growth prospects of fourth generation and cellular iPads in China, and the company's improving margins, I can say that Apple is a solid investment at the moment.


StockCroc1 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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