Apple’s Chinese market demand or bottoming out, the risk begins to turn

On March 19, the latest report stated that the impact of the epidemic on Apple’s business has declined from China’s supply chain challenges and demand. Moody’s believes that Apple’s product demand in the Chinese mainland market bottomed out in February, but the demand recovery is expected to be weak. , The specifics will depend on the economic recovery process in Mainland China. Turning to the larger markets of the United States and Western Europe, demand has experienced a severe contraction in the short term. In the service area, sales decline will affect AppleCare revenue, and ApplePay transaction volume growth may slow down.

Moody’s estimates that the Chinese mainland market accounted for more than 10% of Apple’s revenue before the epidemic. In contrast, the United States and Europe accounted for 39% and 23% of the company’s fiscal year 2019 revenue, respectively.

In Moody’s basic scenario, Apple is expected to increase revenue by about 5% in the 2020 fiscal year. Moody’s believes that the weak demand will continue from the current quarter to at least the next quarter (that is, the third fiscal quarter of 2020), and there is still great uncertainty about the severity and duration of the economic impact of the epidemic.

Moody’s believes that Apple’s credit profile is in line with its Aa1 rating, and that the company has excellent liquidity. Unrestricted cash and investments in the first quarter of fiscal year 2020 are approximately US$187 billion, and free cash flow is expected to be approximately 430 billion in fiscal year 2020. One hundred million U.S. dollars.

Since late February, the U.S. stock market has been volatile. The S&P 500 has retreated nearly 29% from its recent record high and fell into a bear market area. As an important heavyweight stock, Apple performed slightly better than the broader market, with a retracement of nearly 23% from its record high of 327.22 on February 12. At the close of the market on March 18, local time, Apple’s stock price fell 2.45% to $246.67, with a market value of $1.08 trillion.

China’s foundry production capacity is recovering, but the supply chain is still affected by the epidemic in Japan and South Korea

According to data released by the China Academy of Information and Communications Technology last week, Apple’s iPhone shipments in mainland China fell by about 60% year-on-year in February 2020, slightly higher than the 56% drop in the overall shipments of the mainland mobile phone market. As the number of newly diagnosed cases in Mainland China has fallen sharply, Moody’s expects economic activity and spending on non-essential consumer goods to recover.

In February, Apple closed 42 stores on the mainland due to the outbreak. Last Friday, Apple announced that all 42 stores have resumed operations, but all stores outside of China will still be closed for two weeks. Moody’s estimates that the proportion of retail stores in Apple product sales ranges from single-digit high-end to about 15%, with MacBook products at the high-end of this range.

In addition, Moody’s pointed out that Hon Hai Technology, Apple’s main foundry company in China, stated in early March that its output has reached 50% of its seasonal normal production capacity, and there were reports last Thursday that the progress of the Chinese mainland factory’s resumption of work “exceeded expectations.”

Although Hon Hai’s factories failed to resume work after the Spring Festival holiday, which affected production, Moody’s believes that the February epidemic caused a sharp drop in demand in China, Japan, and South Korea, which helped cushion the impact on Apple’s product inventory. And the fiscal season ending in March and June is usually Apple’s off-season.

However, because key component suppliers are located in Japan and South Korea, which are still reducing public activities to control the development of the epidemic, Moody’s believes that Apple’s supply chain disruption risk is still high.

Demand in the European and American markets is shrinking, and revenue is expected to grow by about 5% in fiscal 2020

Although China’s prospects have improved, the shrinking demand caused by the rapid spread of the epidemic in the United States and Western European countries has led to a rapid expansion of Apple’s downside risks. Europe and the Americas together accounted for about 70% of Apple’s revenue in the first quarter of fiscal 2020.

Moody’s included the factors of slowing economic growth in Europe and the Americas in the basic scenario of the latest global macro outlook report. It is expected that consumption in these regions will decline in the first half of 2020, and there will be a certain recovery in the second half of the year. In the basic scenario, Moody’s expects Apple’s revenue to grow by about 5% in fiscal 2020. However, it is currently difficult to quantify the impact of the ongoing epidemic. If the macro situation becomes more unfavorable, it is predicted to face downside risks.

Moody’s also predicts that by the end of the 2020 fiscal year, Apple should be able to recover most of the sales losses caused by the epidemic, because most of the company’s most profitable product line iPhones will come from the replacement of old products. Moody’s pointed out that Apple usually launches new iPhone products in September, and may stimulate sales of older products through promotions.

In addition, Moody’s believes that Apple also has a strong momentum of development in the areas of wearable devices, smart homes and services. AirPods sales promoted a 37% increase in wearable device revenue in the first quarter of fiscal 2020, and service revenue increased by 17%. Moody’s expects that the economic slowdown will simultaneously weaken the revenue growth of these two businesses.

However, as the economic situation improves, both wearable devices and service businesses will have strong growth prospects. Compared with the active customer base of more than 1.5 billion, the penetration rate of AirPods and Apple services is still very low.

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