Apple Fueled By China’s Consumption Patterns

by Robert Hsu | May 2, 2012 7:00 am

Patience pays off.

If you followed my advice last week to wait for a dip below $570 to buy Apple (NASDAQ:AAPL[1]) or add to your position, you got your chance to buy.  And you didn’t have to wait long for your patience to be rewarded: Apple released a China-driven blowout second-quarter report after the market closed on last Tuesday.

Without the help of the company’s Asian supply chain channel checks the analyst community was caught by surprise again by the strength of Apple’s quarter. The stock then gapped up by 9% the next day, a huge move for the world’s most valuable and watched company.

Last quarter, Apple earned $12.30 a share on $39.2 billion in revenue, handily beating analyst consensus estimated earnings of $10.04 a share and revenue of $36.8 billion. The biggest and most important growth market for iPhones[2] this past quarter was China. On Apple’s earnings conference call, CEO Tim Cook said that it was an incredible three months in China, which produced $7.9 billion in revenue, up a staggering 200% from last year, and providing 20% of the company’s total earnings, up from 15% just six months ago.

I’ve said many times before that China will surpass the U.S. as Apple’s largest iPhone market and become the company’s single most important market soon. Most investors and analysts grossly underestimated Apple’s growth in China because they don’t understand consumers and consumer behavior in the world’s largest smartphone market.

Many U.S. investors see only the puny $6,000 average annual income in China. They don’t realize that income figure does not include numerous fat, tax-free perks enjoyed by government and state-owned enterprise employee — perks which often include an iPhone.

Because of the huge population, government worker perks, hidden money and wealth disparity in the country, the buying power for premium status goods in China is far greater than the official numbers indicate.

Apple’s growth in China was a no-brainer for me because I saw firsthand how everyone in Shanghai who is under 45 years old and has a social life now regards an iPhone as an essential status item. That is why it is important to have a boots-on-the-ground view in China and spend time there regularly.

While I have been pounding the table regarding growth in China being the single most important component for Apple in 2012, I expect still greater growth there. The company has yet to partner with China Mobile, the country’s dominant wireless carrier as well as the world’s largest. That should happen later this year with the release of the iPhone 5 and further fuel the company’s China growth.

Congratulations to those of you who maintained a disciplined strategy and bought the stock below our $570 buy limit earlier this week. Following the company’s blowout earnings, I expect Apple to trade in a new higher trading range.

Source URL: https://investorplace.com/2012/05/apple-and-chinas-consumption-patterns-aapl/

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