AAPL - Apple Inc.

[rishig]

Note the largest "surprise" was the higher than expected drop in sales in China, most of it in Hong Kong. Having spent a lot of time looking at Richemont (that has ~35% of sales in China/Hong Kong) and reading Qs and Ks of property companies that own retail malls in China and Hong Kong, I would like to provide some context on the sales drop, but before that refer to the following Q/A from the earnings call today:

 

Shannon S. Cross - Cross Research LLC

 

Thank you very much. I have a couple questions. One, Tim, can you talk a bit about what's going on in China? I know the Greater China revenue I think was down 26%. You did talk about Mainland China. But just if you could, talk about some of the trends you're seeing there and how you think it's playing out, and maybe your thoughts on iPhone SE adoption within China as well.

 

Timothy Donald Cook - Chief Executive Officer & Director

 

Shannon, thanks for the question. If you take Greater China, we include Taiwan, Hong Kong, and Mainland China in the Greater China segment that you see reported on your data sheet. The vast majority of the weakness in the Greater China region sits in Hong Kong. And our perspective on that is it's a combination of the Hong Kong dollar being pegged to the U.S. dollar, and therefore it carries the burden of the strength of the U.S. dollar. And that has driven tourism, international shopping, and trading down significantly compared to what it was in the year ago.

 

If you look at Mainland China, which is one that I am personally very focused on, we are down 11% in Mainland China on a reported basis. On a constant currency basis, we're only down 7%. And the way that we really look at the health or underlying demand is look at sell-through. And if you look at it there, we were down 5%. And keep in mind that that's down 5% on a comp a year ago that was up 81%.

 

And so as I back up from this and look at the larger picture, I think China is not weak as has been talked about. I see China as may not have the wind at our backs that we once did, but it's a lot more stable than what I think is the common view of it. And so we remain really optimistic on China.

 

So, if you haven't followed the Richemont thread, let me provide some context on Hong Kong sales (sorry, if this is repetition).

 

Overall retail sales in Hong Kong last year were very weak. This is a combination of a few factors:

1. Hong Kong is a shopping destination, mostly driven by visitors from mainland China. In 2003, China passed the individual visitor scheme allowing individuals to visit Hong Kong. Prior to that, visitors from mainland China could only visit on business or in group tours. This started the Hong Kong boom. Visitors from mainland China grew from 12M annually in 2003 to 47M in 2014. This is in a city with 7M people. As visitors came, retail sales boomed. Note that taxes in Hong Kong is much lower.

2. In 2015, visitors from mainland China dropped for the first time since 2003. In 2015, visitors from mainland dropped to 40M (from 47M in the prior year). Part of the reason is the strong USD (as Cook says in his comment).

3. Another reason is the hostility in Hong Kong against mainland Chinese visitors. Search the local news, this was all over. There were major protests and quite a few incidents of violence against mainland Chinese visitors. (Happy to tell you more about this if you are curious). Not very helpful for a retail economy that depends largely on shopping by tourists.

4. If you have been in China or Hong Kong, you will notice something that's very unusual. Almost any one that has an iPhone 6 has one with a gold cover. Why? Gold is a prestigious color in China and prestige is what drives sales in China. See here: http://fortune.com/2014/07/26/apples-iphone-is-golden-in-china.

5. Ask yourself why the most unlikely retailer to succeed in China, Starbucks, succeeded in a big way in a nation that is a tea drinking nation. Chinese consumer will spend thousands of dollars on a handbag by Louis Vuitton (public consumption) but Victoria Secret has not had much success in selling a few hundred dollar bras (not public consumption). If you have about an hour, here is a very interesting talk by a western advertising exec who has lived in China for over a decade on "What Chinese Want?". See

6. Typically, the sales that didn't occur in Hong Kong would have occurred in say a place like Europe (with the Euro been so weak), but the two attacks (Paris and Brussels) have hurt tourism in Europe (know this from owning Priceline Group).

 

So, all in all, it seems like a perfect storm of a several temporary factors coming together. I don't own Apple, but I don't think the weakening in sales in China is a structural issue.

[Viking]

roark33, I will be watching Apple closely the next couple of weeks and if the shares get crazy cheap I will likely once again be a buyer. I love the company and would be happy owning shares as I do believe their best days are in the future.

[dorsiacapital]

I'm a big Apple bull but I do admit the most recent quarter was the first legitimately disappointing quarter I can remember Apple having in a very long time, even though I think it's somewhat to be expected because of the 6 Upgrade cycle and China weakness. (For context, I thought the trip down from 700 to 400 pre split was one of the craziest cases of market hysteria I've ever seen).

 

Nonetheless, I do think it's funny to go back and read some negative quotes from January 2011 that appear on the very first page of this very long thread. The song largely remains the same, and Apple has done well since then (past performance no guarantee of future results....)

 

 

"I am not sure how many new devices Apple can produce now that their theme is out.  Integrated computers, phones, tablets and TV's.  How about integration with video?  There is no easy way to link my kid's videos into an Apple format that I know of (recorded on a Sony)."

 

"3)  If I was Apple and wanted to buy back stock, I would have done it at $90 and not $350.  Come on."

 

"I have a friend who made good money on 300 2012 leaps. Now he is concerned about his profits and health of Steve Jobs. If he sells it will be a short term gain. Can he do a offsetting transaction and clear both transaction in June for long term gain. Any suggestions from experienced traders welcome.

 

PS I agree with his assessment of Steve Jobs. If he has recurrence, he is highly unlikely be able to come back. I am considering some long term puts"

 

and then of course this comment represents bulls nicely (of course now ex cash p/e lower, growth rate negative)

 

"I don't own Apple but it's currently trading at 11X 2011 earnings (ex cash) growing like crazy.  Some very smart value investors own the stock."

[giofranchi]

What if the 2-year cycle changes?  What data do you have to justify the 2-year cycle will continue?  I think it is hard to see greater than modest growth from AAPL over the next several years.

 

Logan

 

Logan,

 

Tim Cook has commented on the upgrade rate saying that for the iPhone 6s it has been slightly faster than for the iPhone 5s two years ago, although slower than it had been for the iPhone 6.

 

Anyway, I would be very happy with modest growth in sales and earnings + a dividend that keeps increasing 10% each year + some buybacks.

 

Cheers,

 

Gio

 

[VAL9000]

Overall retail sales in Hong Kong last year were very weak. This is a combination of a few factors:

1. Hong Kong is a shopping destination, mostly driven by visitors from mainland China. In 2003, China passed the individual visitor scheme allowing individuals to visit Hong Kong. Prior to that, visitors from mainland China could only visit on business or in group tours. This started the Hong Kong boom. Visitors from mainland China grew from 12M annually in 2003 to 47M in 2014. This is in a city with 7M people. As visitors came, retail sales boomed. Note that taxes in Hong Kong is much lower.

2. In 2015, visitors from mainland China dropped for the first time since 2003. In 2015, visitors from mainland dropped to 40M (from 47M in the prior year). Part of the reason is the strong USD (as Cook says in his comment).

3. Another reason is the hostility in Hong Kong against mainland Chinese visitors. Search the local news, this was all over. There were major protests and quite a few incidents of violence against mainland Chinese visitors. (Happy to tell you more about this if you are curious). Not very helpful for a retail economy that depends largely on shopping by tourists.

4. If you have been in China or Hong Kong, you will notice something that's very unusual. Almost any one that has an iPhone 6 has one with a gold cover. Why? Gold is a prestigious color in China and prestige is what drives sales in China. See here: http://fortune.com/2014/07/26/apples-iphone-is-golden-in-china.

5. Ask yourself why the most unlikely retailer to succeed in China, Starbucks, succeeded in a big way in a nation that is a tea drinking nation. Chinese consumer will spend thousands of dollars on a handbag by Louis Vuitton (public consumption) but Victoria Secret has not had much success in selling a few hundred dollar bras (not public consumption). If you have about an hour, here is a very interesting talk by a western advertising exec who has lived in China for over a decade on "What Chinese Want?". See

6. Typically, the sales that didn't occur in Hong Kong would have occurred in say a place like Europe (with the Euro been so weak), but the two attacks (Paris and Brussels) have hurt tourism in Europe (know this from owning Priceline Group).

 

So, all in all, it seems like a perfect storm of a several temporary factors coming together. I don't own Apple, but I don't think the weakening in sales in China is a structural issue.

 

So let me get this right.  HK retail is overwhelmingly driven by mainland visitors.  Mainland visitors stop visiting HK to shop.

 

iPhone is a product that is just as easy to buy in mainland China vs. HK.  Meaning there is no barrier to consumption if you don't go to HK.  Sales also drop in mainland China even after accounting for a bump in sales that would otherwise have occurred in HK.  The euro travel comment further compounds this.

 

I think this just makes Tim's comment harder to believe.  The weakness is regional where he's positioning it as local to HK.

 

I'm not sure how a 5% currency strengthening can account for a 26% drop in sales.

 

[TorontoRaptorsFan]

roark33, I will be watching Apple closely the next couple of weeks and if the shares get crazy cheap I will likely once again be a buyer. I love the company and would be happy owning shares as I do believe their best days are in the future.

 

I agree. I think they have one of the best management teams, lots of cash, and I do think they'll make continuous improvements to the iWatch. Cook hinted to making larger acquisitions than the one they made for Beats if they feel it will help.

[giofranchi]

I think this just makes Tim's comment harder to believe.  The weakness is regional where he's positioning it as local to HK.

 

Do you think the "China problem" is structural? If so, why?

 

Thank you,

 

Gio

[Palantir]

 

Anyway, I would be very happy with modest growth in sales and earnings + a dividend that keeps increasing 10% each year + some buybacks.

 

 

What level of total return do you anticipate with this scenario?

[giofranchi]

What level of total return do you anticipate with this scenario?

 

With neither a meaningful contraction nor expansion in the multiple it is selling for, I would expect an 8%-10% return annual.

It is basically what I look for from my stock market investments in general. To get to my goal of 15% annual the remaining 5%-7% must be free cash my own businesses generate.

At least in theory that's my "business plan".

 

Cheers,

 

Gio

 

[petec]

The challenges with iPad sales the past two years has surprised me and provides a watch out for Apple investors. I don't think iPad is losing sales to a competitor; the products are built so well and they perform so well people are not upgrading them.

 

+1

[TheAiGuy]

What level of total return do you anticipate with this scenario?

 

With neither a meaningful contraction nor expansion in the multiple it is selling for, I would expect an 8%-10% return annual.

It is basically what I look for from my stock market investments in general. To get to my goal of 15% annual the remaining 5%-7% must be free cash my own businesses generate.

At least in theory that's my "business plan".

 

Cheers,

 

Gio

 

My modeling suggests the same, FWIW.

 

 

[gary17]

Overall retail sales in Hong Kong last year were very weak. This is a combination of a few factors:

1. Hong Kong is a shopping destination, mostly driven by visitors from mainland China. In 2003, China passed the individual visitor scheme allowing individuals to visit Hong Kong. Prior to that, visitors from mainland China could only visit on business or in group tours. This started the Hong Kong boom. Visitors from mainland China grew from 12M annually in 2003 to 47M in 2014. This is in a city with 7M people. As visitors came, retail sales boomed. Note that taxes in Hong Kong is much lower.

2. In 2015, visitors from mainland China dropped for the first time since 2003. In 2015, visitors from mainland dropped to 40M (from 47M in the prior year). Part of the reason is the strong USD (as Cook says in his comment).

3. Another reason is the hostility in Hong Kong against mainland Chinese visitors. Search the local news, this was all over. There were major protests and quite a few incidents of violence against mainland Chinese visitors. (Happy to tell you more about this if you are curious). Not very helpful for a retail economy that depends largely on shopping by tourists.

4. If you have been in China or Hong Kong, you will notice something that's very unusual. Almost any one that has an iPhone 6 has one with a gold cover. Why? Gold is a prestigious color in China and prestige is what drives sales in China. See here: http://fortune.com/2014/07/26/apples-iphone-is-golden-in-china.

5. Ask yourself why the most unlikely retailer to succeed in China, Starbucks, succeeded in a big way in a nation that is a tea drinking nation. Chinese consumer will spend thousands of dollars on a handbag by Louis Vuitton (public consumption) but Victoria Secret has not had much success in selling a few hundred dollar bras (not public consumption). If you have about an hour, here is a very interesting talk by a western advertising exec who has lived in China for over a decade on "What Chinese Want?". See

6. Typically, the sales that didn't occur in Hong Kong would have occurred in say a place like Europe (with the Euro been so weak), but the two attacks (Paris and Brussels) have hurt tourism in Europe (know this from owning Priceline Group).

 

So, all in all, it seems like a perfect storm of a several temporary factors coming together. I don't own Apple, but I don't think the weakening in sales in China is a structural issue.

 

So let me get this right.  HK retail is overwhelmingly driven by mainland visitors.  Mainland visitors stop visiting HK to shop.

 

iPhone is a product that is just as easy to buy in mainland China vs. HK.  Meaning there is no barrier to consumption if you don't go to HK.  Sales also drop in mainland China even after accounting for a bump in sales that would otherwise have occurred in HK.  The euro travel comment further compounds this.

 

I think this just makes Tim's comment harder to believe.  The weakness is regional where he's positioning it as local to HK.

 

I'm not sure how a 5% currency strengthening can account for a 26% drop in sales.

 

i don't own shares in Apple but I like to point out the whole HK is a tax-free region - so when the YUAN and the HKD are at parity ; it make sense to buy in Hong Kong.  People also like shopping in Hong Kong - it's the same as Chinese visitors in LV headquarters in Paris buying lots of bags (one lady I saw once had 20).  These are stuff available in China - people just like to buy them outside of China lol      Ever heard of Chinese buying up all the formula milk in New Zealand / Australia ?

 

Since then the yuan has devalued while the HKD is still fixed to USD, making the tax-incentive disappear.  I think wha Tim said makes total sense.

 

[Mephistopheles]

One thing that iPhone/iOS (and Android) have is the many thousands of apps that are available only for them two. The apps make the consumers sticky which leads to even more app developers only investing in the two.

 

Nokia and Blackberry didn't have this.

[DCG]

Cook hinted to making larger acquisitions than the one they made for Beats if they feel it will help.

 

 

That's not really what I want to hear.

[Palantir]

What level of total return do you anticipate with this scenario?

 

With neither a meaningful contraction nor expansion in the multiple it is selling for, I would expect an 8%-10% return annual.

It is basically what I look for from my stock market investments in general. To get to my goal of 15% annual the remaining 5%-7% must be free cash my own businesses generate.

At least in theory that's my "business plan".

 

Cheers,

 

Gio

 

Sounds fair, so effectively you are a leveraged investor primarily growing your company's equity, which makes sense. For a "regular" investor simply owning stock in an account, I have a hard time seeing how 8-10% would be an attractive return though.

[handycap5]

Note the largest "surprise" was the higher than expected drop in sales in China, most of it in Hong Kong. Having spent a lot of time looking at Richemont (that has ~35% of sales in China/Hong Kong) and reading Qs and Ks of property companies that own retail malls in China and Hong Kong, I would like to provide some context on the sales drop, but before that refer to the following Q/A from the earnings call today:

 

Shannon S. Cross - Cross Research LLC

 

Thank you very much. I have a couple questions. One, Tim, can you talk a bit about what's going on in China? I know the Greater China revenue I think was down 26%. You did talk about Mainland China. But just if you could, talk about some of the trends you're seeing there and how you think it's playing out, and maybe your thoughts on iPhone SE adoption within China as well.

 

Timothy Donald Cook - Chief Executive Officer & Director

 

Shannon, thanks for the question. If you take Greater China, we include Taiwan, Hong Kong, and Mainland China in the Greater China segment that you see reported on your data sheet. The vast majority of the weakness in the Greater China region sits in Hong Kong. And our perspective on that is it's a combination of the Hong Kong dollar being pegged to the U.S. dollar, and therefore it carries the burden of the strength of the U.S. dollar. And that has driven tourism, international shopping, and trading down significantly compared to what it was in the year ago.

 

If you look at Mainland China, which is one that I am personally very focused on, we are down 11% in Mainland China on a reported basis. On a constant currency basis, we're only down 7%. And the way that we really look at the health or underlying demand is look at sell-through. And if you look at it there, we were down 5%. And keep in mind that that's down 5% on a comp a year ago that was up 81%.

 

And so as I back up from this and look at the larger picture, I think China is not weak as has been talked about. I see China as may not have the wind at our backs that we once did, but it's a lot more stable than what I think is the common view of it. And so we remain really optimistic on China.

 

So, if you haven't followed the Richemont thread, let me provide some context on Hong Kong sales (sorry, if this is repetition).

 

Overall retail sales in Hong Kong last year were very weak. This is a combination of a few factors:

1. Hong Kong is a shopping destination, mostly driven by visitors from mainland China. In 2003, China passed the individual visitor scheme allowing individuals to visit Hong Kong. Prior to that, visitors from mainland China could only visit on business or in group tours. This started the Hong Kong boom. Visitors from mainland China grew from 12M annually in 2003 to 47M in 2014. This is in a city with 7M people. As visitors came, retail sales boomed. Note that taxes in Hong Kong is much lower.

2. In 2015, visitors from mainland China dropped for the first time since 2003. In 2015, visitors from mainland dropped to 40M (from 47M in the prior year). Part of the reason is the strong USD (as Cook says in his comment).

3. Another reason is the hostility in Hong Kong against mainland Chinese visitors. Search the local news, this was all over. There were major protests and quite a few incidents of violence against mainland Chinese visitors. (Happy to tell you more about this if you are curious). Not very helpful for a retail economy that depends largely on shopping by tourists.

4. If you have been in China or Hong Kong, you will notice something that's very unusual. Almost any one that has an iPhone 6 has one with a gold cover. Why? Gold is a prestigious color in China and prestige is what drives sales in China. See here: http://fortune.com/2014/07/26/apples-iphone-is-golden-in-china.

5. Ask yourself why the most unlikely retailer to succeed in China, Starbucks, succeeded in a big way in a nation that is a tea drinking nation. Chinese consumer will spend thousands of dollars on a handbag by Louis Vuitton (public consumption) but Victoria Secret has not had much success in selling a few hundred dollar bras (not public consumption). If you have about an hour, here is a very interesting talk by a western advertising exec who has lived in China for over a decade on "What Chinese Want?". See

6. Typically, the sales that didn't occur in Hong Kong would have occurred in say a place like Europe (with the Euro been so weak), but the two attacks (Paris and Brussels) have hurt tourism in Europe (know this from owning Priceline Group).

 

So, all in all, it seems like a perfect storm of a several temporary factors coming together. I don't own Apple, but I don't think the weakening in sales in China is a structural issue.

 

Really great explanation and above average comment. My appreciation and compliments...

[VAL9000]

I think this just makes Tim's comment harder to believe.  The weakness is regional where he's positioning it as local to HK.

 

Do you think the "China problem" is structural? If so, why?

 

Thank you,

 

Gio

 

Yes because Apple's competitive pressures are structural.  Products are too expensive vs. value delivered.  This is my longstanding opinion.

 

[VAL9000]

i don't own shares in Apple but I like to point out the whole HK is a tax-free region - so when the YUAN and the HKD are at parity ; it make sense to buy in Hong Kong.  People also like shopping in Hong Kong - it's the same as Chinese visitors in LV headquarters in Paris buying lots of bags (one lady I saw once had 20).  These are stuff available in China - people just like to buy them outside of China lol      Ever heard of Chinese buying up all the formula milk in New Zealand / Australia ?

 

HK being a tax-free region is interesting and not something I knew.  Still, I'm going to guess that the cost of traveling and staying in HK far exceeds the cost of paying tax in mainland China..  even when divided across many thousands of dollars bought during an HK shopping spree.

 

[rishig]

i don't own shares in Apple but I like to point out the whole HK is a tax-free region - so when the YUAN and the HKD are at parity ; it make sense to buy in Hong Kong.  People also like shopping in Hong Kong - it's the same as Chinese visitors in LV headquarters in Paris buying lots of bags (one lady I saw once had 20).  These are stuff available in China - people just like to buy them outside of China lol      Ever heard of Chinese buying up all the formula milk in New Zealand / Australia ?

 

HK being a tax-free region is interesting and not something I knew.  Still, I'm going to guess that the cost of traveling and staying in HK far exceeds the cost of paying tax in mainland China..  even when divided across many thousands of dollars bought during an HK shopping spree.

 

iPhone 6s price comparison across Asia:

http://i0.wp.com/www.mobileworldlive.com/wp-content/uploads/2015/10/iphone6stable.png

 

As of Oct 2015, the 6s iPhone in China was selling at about $100-$200 more than in most Asian markets. Hong Kong was the cheapest market in Asia for the 6s. The regulatory approval process in China had setback the launch date by more than a month for iPhone 6 and 6s. See

https://www.techinasia.com/china-regulators-give-final-approval-iphone6

 

As China waited for iPhone to go on sale in mainland, the price of grey market imports skyrocketed to USD 1,600 and in some cases as much as USD 5,000. See

https://www.techinasia.com/china-wait-grey-market-iphones-selling-5000-official-release-date-sight

 

Combine this with the fact that iPhone got released in Hong Kong before any other market and you have a making of a very active grey market.  Chinese new portal Sina carried photos of a Chinese smuggler who was caught carrying 146 iPhones strapped to his belly (i.e. USD 76,000 - $180,000). See

https://www.techinasia.com/gray-market-iphones-china

 

Recently, due to protests against mainland Chinese visitors led a new law to be passed that scraped unlimited-entry visas for residents of Shenzhen visiting Hong Kong. See

http://www.bbc.com/news/world-asia-china-32282029

 

So what was the reason for these protests. If you live in San Francisco Bay Area, the reasons are not too different from the San Francisco locals protesting against tech employees who work in the Bay Area but live in San Francisco and probably causing a surge in prices. See

http://qz.com/616843/negative-news-about-hong-kong-kept-mainland-visitors-away-this-lunar-new-year/

 

Because of the new law, same day visitors have dropped in Hong Kong. See here:

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/01-overflow/AAPL%20HK.jpg

 

The point about there being more competition now is valid, but that does not explain why sales in Hong Kong fell by a whooping large number. For those of us who live in a part of the world that is so far away from Hong Kong, I am just explaining the probable cause for this large drop.

[rishig]

Note the largest "surprise" was the higher than expected drop in sales in China, most of it in Hong Kong. Having spent a lot of time looking at Richemont (that has ~35% of sales in China/Hong Kong) and reading Qs and Ks of property companies that own retail malls in China and Hong Kong, I would like to provide some context on the sales drop, but before that refer to the following Q/A from the earnings call today:

 

Shannon S. Cross - Cross Research LLC

 

Thank you very much. I have a couple questions. One, Tim, can you talk a bit about what's going on in China? I know the Greater China revenue I think was down 26%. You did talk about Mainland China. But just if you could, talk about some of the trends you're seeing there and how you think it's playing out, and maybe your thoughts on iPhone SE adoption within China as well.

 

Timothy Donald Cook - Chief Executive Officer & Director

 

Shannon, thanks for the question. If you take Greater China, we include Taiwan, Hong Kong, and Mainland China in the Greater China segment that you see reported on your data sheet. The vast majority of the weakness in the Greater China region sits in Hong Kong. And our perspective on that is it's a combination of the Hong Kong dollar being pegged to the U.S. dollar, and therefore it carries the burden of the strength of the U.S. dollar. And that has driven tourism, international shopping, and trading down significantly compared to what it was in the year ago.

 

If you look at Mainland China, which is one that I am personally very focused on, we are down 11% in Mainland China on a reported basis. On a constant currency basis, we're only down 7%. And the way that we really look at the health or underlying demand is look at sell-through. And if you look at it there, we were down 5%. And keep in mind that that's down 5% on a comp a year ago that was up 81%.

 

And so as I back up from this and look at the larger picture, I think China is not weak as has been talked about. I see China as may not have the wind at our backs that we once did, but it's a lot more stable than what I think is the common view of it. And so we remain really optimistic on China.

 

So, if you haven't followed the Richemont thread, let me provide some context on Hong Kong sales (sorry, if this is repetition).

 

Overall retail sales in Hong Kong last year were very weak. This is a combination of a few factors:

1. Hong Kong is a shopping destination, mostly driven by visitors from mainland China. In 2003, China passed the individual visitor scheme allowing individuals to visit Hong Kong. Prior to that, visitors from mainland China could only visit on business or in group tours. This started the Hong Kong boom. Visitors from mainland China grew from 12M annually in 2003 to 47M in 2014. This is in a city with 7M people. As visitors came, retail sales boomed. Note that taxes in Hong Kong is much lower.

2. In 2015, visitors from mainland China dropped for the first time since 2003. In 2015, visitors from mainland dropped to 40M (from 47M in the prior year). Part of the reason is the strong USD (as Cook says in his comment).

3. Another reason is the hostility in Hong Kong against mainland Chinese visitors. Search the local news, this was all over. There were major protests and quite a few incidents of violence against mainland Chinese visitors. (Happy to tell you more about this if you are curious). Not very helpful for a retail economy that depends largely on shopping by tourists.

4. If you have been in China or Hong Kong, you will notice something that's very unusual. Almost any one that has an iPhone 6 has one with a gold cover. Why? Gold is a prestigious color in China and prestige is what drives sales in China. See here: http://fortune.com/2014/07/26/apples-iphone-is-golden-in-china.

5. Ask yourself why the most unlikely retailer to succeed in China, Starbucks, succeeded in a big way in a nation that is a tea drinking nation. Chinese consumer will spend thousands of dollars on a handbag by Louis Vuitton (public consumption) but Victoria Secret has not had much success in selling a few hundred dollar bras (not public consumption). If you have about an hour, here is a very interesting talk by a western advertising exec who has lived in China for over a decade on "What Chinese Want?". See

6. Typically, the sales that didn't occur in Hong Kong would have occurred in say a place like Europe (with the Euro been so weak), but the two attacks (Paris and Brussels) have hurt tourism in Europe (know this from owning Priceline Group).

 

So, all in all, it seems like a perfect storm of a several temporary factors coming together. I don't own Apple, but I don't think the weakening in sales in China is a structural issue.

 

Really great explanation and above average comment. My appreciation and compliments...

 

Thank you.

[oldcookie]

HK being a tax-free region is interesting and not something I knew.  Still, I'm going to guess that the cost of traveling and staying in HK far exceeds the cost of paying tax in mainland China..  even when divided across many thousands of dollars bought during an HK shopping spree.

 

Was in the HK not long ago that definitely noticed a huge drop in terms of number of mainland shoppers.  When I was there 4 years ago, you cannot go into a shop without being squeezed out by people coming in to buy 10 of everything.  This past trip, it was surprising quiet. (Relatively speaking, it is HK, after all.)  Speaking to people who live in China, there are a couple of changes. 

[*]HKD is pegged to USD,

[*]real estate prices in HK drove up hotel costs

[*]real estate prices in HK drove up retail prices

 

It cost people in China less to travel to Seoul, Sapporo, Osaka, etc. and the products themselves cost less in those locations. People have a lot more choices where they are going to shop.  So Hong Kong is definitely weak.  Interestingly, on the same trip, I was in Osaka, and there were tons of Chinese shoppers there.

 

Luxury tax in China can be up to 30% depending on the product you are buying.  So if you buy an Hermes handbag while you are abroad, the money you save can pretty much pay for the trip and more.

[Liberty]

http://i.imgur.com/pXmDdHg.jpg

 

Pretend last year's numbers are blank and tell me that the past two quarters aren't about where you'd expect things to be looking at the longer-term trend... (Except maybe they'd be a bit higher if last year's cycle hadn't been so strong that it pulled some sales from 2016 into 2015...)

[KCLarkin]

Yes because Apple's competitive pressures are structural.  Products are too expensive vs. value delivered.  This is my longstanding opinion.

 

Unfortunately, your opinion doesn't square with the fact that Apple is taking market share:

http://www.cnbc.com/2016/04/27/apple-gained-high-end-smartphone-marketshare-in-china-nielsen-survey-reveals.html

[KCLarkin]

Pretend last year's numbers are blank and tell me that the past two quarters aren't about where you'd expect things to be looking at the longer-term trend... (Except maybe they'd be a bit higher if last year's cycle hadn't been so strong that it pulled some sales from 2016 into 2015...)

 

Looks great to me. The only question is whether a weak Q3 and Q4 will break that trend.

 

I think that the thesis that iPhone 6 launch pulled demand forward is pretty sound. Will probably see an echo boom with either the 7 or 8.

 

Disclosure: no position but will get interested if this gets to low 90s.

[VAL9000]

Yes because Apple's competitive pressures are structural.  Products are too expensive vs. value delivered.  This is my longstanding opinion.

 

Unfortunately, your opinion doesn't square with the fact that Apple is taking market share:

http://www.cnbc.com/2016/04/27/apple-gained-high-end-smartphone-marketshare-in-china-nielsen-survey-reveals.html

 

Now I'm really confused.  Apple gained marketshare while selling fewer phones into a growing market.  How?