China vs. USA – Sucker punch

Apple is at higher risk than Qualcomm.

• Both Apple and Qualcomm have taken a hit over their exposure to China, but the reality is that Apple carries much higher exposure to China than Qualcomm does even though the numbers signal the opposite.
• Apple’s shares fell by 2.9% and Qualcomm by 7.2% on a series of stories that included Apple products being banned from Chinese government buildings and Huawei’s new phone taking share from Apple and its Kirin9000s chipset taking share from Qualcomm.
  • First, Apple: 19% of FQ3 23 revenues came from greater China where Apple sells its products directly to consumers.
  • This is crucial because if China was to ban the sale of Apple products, 19% of Apple’s revenues would disappear and not return until the ban was lifted.
  • I think that this is extremely unlikely to occur as it would greatly annoy large numbers of Chinese citizens which is something the Chinese state likes to avoid.
  • Furthermore, the notion that the Huawei Mate P60 Pro is in any way a competitor to the iPhone is far-fetched in my opinion.
  • Users do not buy Apple products because it makes nice hardware, they buy them because of the ecosystem that buying Apple products grants access to.
  • The Huawei Kirin 9000s processor (see below) ranks far below Apple’s A16 Bionic chip in terms of performance and so Apple’s new iPhone will be smaller, faster and consume less power than Huawei.
  • Hence, no rational Chinese user would choose the Huawei Mate P60 Pro over the latest iPhone from Apple meaning that it will take some sort of nationalist intervention to cause Apple to lose share to Huawei.
  • Second, Qualcomm where in FY 2022, 63.6% of revenues came from China including Hong Kong.
  • This makes Qualcomm look far more exposed to China than Apple is, but the situation is more nuanced than the headlines.
  • The majority of Qualcomm’s revenues (73% in FQ3 23) come from the mobile handset industry where the majority of devices are assembled in China and then exported for sale in the rest of the world.
  • Consequently, most of the end demand that results in Qualcomm selling chips into China is coming from the rest of the world and as such, will remain independent of any action taken by the Chinese state.
  • This means that if Qualcomm was banned from selling its chips into China, many of its customers would probably accelerate their diversification away from China and assemble their devices elsewhere.
  • Hence, while Qualcomm would take a large hit in the immediate term, a lot of the lost business would eventually come back although it would take some time.
  • Furthermore, a hit to Qualcomm in China would also be a big hit to Chinese companies who dominate the Android market after Samsung and need to ensure that their products are competitive outside of China.
  • Even in the best instance, the Kirin 9000s is no match for either MediaTek’s latest Dimensity 1200+ chip or Qualcomm’s Snapdragon 8 Gen 2.
  • Geekbench tests run on the Kirin9000s give it a single core score of 1055 and a multicore score of 3798.
  • This compares to Snapdragon 8 Gen 2 of 1493 / 4991 and Dimensity 9200+ of 1504 / 5421.
  • Apple remains way out front with a single core score of 1891 and a multicore score of 5419 (see here).
  • Consequently, the idea that Huawei’s new phone or its chipset can compete on a level playing field in China and overseas holds no water on the available evidence.
• As a result, I don’t think that the release of the Huawei Mate Pro 60 and the revelations about its silicon change the competitive landscape meaningfully either in China or overseas.
• What has changed is the media chatter, propaganda and speculation which never looks further than skin deep and has impacted market sentiment.
• There is a slightly increased possibility of retaliation by the Chinese state against US companies that do business in China where RFM Research and Alavan Independent have long held the view that Apple and Qualcomm are the most exposed.
• I think that outright action against these two companies is unlikely because of how it might annoy Chinese citizens (Apple) or damage domestic companies (Qualcomm).
• This is why China went after Micron because Chinese companies can source their products from elsewhere and will suffer no ill effects from banning Micron (see here).
• Qualcomm has really suffered from the smartphone downturn and is now trading on 12.7x 2023 PER and 11.5x 2024.
• This is now much cheaper than MediaTek (circa 16x 2023 and TSMC circa 16x 2023 PER).
• Furthermore, the long-term looks good as Qualcomm is signing contracts for automotive left, right and centre, utterly dominates The Metaverse and Apple shows no sign of making a 5G modem that would allow it to boot Qualcomm from its products any time soon.
• The street has long been factoring in Qualcomm losing Apple and is constantly having to revise its estimates.
• Qualcomm should also be able to win a good slice of the laptop processor market if its Nuvia-designed processor lives up to expectations much of which should be revealed at the Snapdragon summit in late October.
• With the shares now below my $108 threshold, I think the time has come to buy some as all the bad news looks to be in the price and none of the potential.
• There are still risks but at this level, they look skewed substantially to the upside.