How Is Apple's China Risk-Reward Scenario Playing Out?

China is one of Apple, Inc. AAPL's key markets, and the Greater China region, including mainland China, Taiwan, Macau and Hong Kong, accounted for about 18% of Cupertino's total revenue in the June quarter.

Apple's year-over-year revenue growth in the region was about 58%. 

BofA Securities analyst Wamsi Mohan broke down the opportunities and risks Apple faces in China in a Tuesday note. 

Apple China Share 'Win-Win' Relation: Apple has been navigating through the changing sentiment and policies in China, including the U.S.-China trade war, fairly well, Mohan said.

In 2020, 18% of all iPhone sales were in China, the analyst said, citing Strategy Analytics. A significant installed base of older iPhones in China exists that could be upgraded to the iPhone 13, he said. 

A survey in September showed that about 34% of the China survey respondents intended to upgrade to an iPhone despite the Phone 13 starting prices being higher than most competitor phones in China, Mohan said.

Between the first quarters of 2020 and 2021, Huawei's smartphone market share declined from 22.7% to 3.8%, partly due to component restrictions placed on Huawei, the analyst said.

Apple's share grew from 10.7% to 13.8% in the same period, he said. 

Apple has priced its iPhone 13 models about 300-800 yuan ($46-$124) cheaper than the corresponding launch price of iPhone 12 models with the same storage capacity, Mohan said.

This could be aimed at gaining further share, he said.

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Apple's Key China Risks: BofA estimates 210 million iPhone unit sales in fiscal year 2022, with 40 million to 50 million of those phones likely to be sold in China.

A resurgence in nationalist sentiment in China could negatively impact iPhone sales, Mohan said.

Every 10% drop in iPhone sales in China would imply 4-5 million lower iPhone unit sales or a roughly $4-billion revenue headwind, the analyst said. 

China App Store gaming revenue in 2020 was $4.3 billion, with $1.9 billion coming from Tencent Holdings Limited TCEHY Mobile, Mohan said, citing data from SensorTower.

The Chinese government has raised concerns regarding gaming addiction in the past and has stopped issuing video game licenses, the analyst said. 

"In our opinion, tighter regulations could create headwinds to Appstore rev growth," he said. 

BofA has a Neutral rating on Apple with a $160 price target. 

AAPL Price Action: Apple shares gained 0.34% Tuesday, closing at $143.43. 

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