Apple Store in Hangzhou China: Popularity of Apple Products in China
& Apple’s Second Quarter Earnings Preview
March 31, 2015
During the “Spring Forward” presentation at the Yerba Buena Convention Center on March 9, Tim Cook, Apple’s CEO, started off with introducing a newly-opened Apple Store in Hangzhou, China, while showing the great popularity of Apple’s products in the second largest economy across the globe. Hangzhou, the capital of Zhejiang province, is located about 100 miles southwest to Shanghai and the city is well known among domestic as well as international tourists for the historic West Lake. Only a few blocks off from the West Lake, the modern-looking Apple store stands elegantly, attracting thousands of customers each day. According to Deutsche Bank Research, per capita GDP in Zhejiang province in 2014 is more than 68,000RMB (or US$11,000 at current exchange rate as of March 30, 2015), which is well above the national average while Shanghai’s per capita GDP in 2014 is nearly 90,000RMB. With population of 55 million in the province, Hangzhou Apple store is well suited to attract growing upper middle-income Chinese consumers. Apple’s success in China is real thanks to its modern brands that impress growing upper middle-income Chinese consumers. Going forward, China’s consumption of Apple products will soon overtake wealthier Europeans’ and such demand will definitely help to push Apple to the first-ever a $1 trillion market-cap company.
Unlike Apple Stores in the United States, the stores in China seem to have become Apple’s “annual meeting” everyday. Each Apple store is vast and crowded though the service standard offered by Apple employees is exceptional. The problem yields the difficulty of finding an available staff to get helped. Still, the stores are well organized and the lecture offered by Apple staff seems one of the most poplar parts when visiting. Not only does popular iPhones grab Chinese consumers, but the other products, such as MacBook, also attract them to be a new user of Apple’s product-wide ecosystems. On the day when I visited the beautiful Hangzhou Apple Store, which just opened a few months earlier, it was already crowded, like an Apple event where journalists are trying to learn each item to find out pros and cons, and the Chinese consumers are alike.
Over the past years, reasonably attainable Samsung, HTC, and Huawei smartphones had grabbed middle-income Chinese consumers to let them enjoy new life styles at their income-levels. Now, those consumers are turning into upper middle-income consumers, who start to shift their tastes to pricier and modern iPhones. In the wealthier city, like Shanghai, you will see more iPhones users on the subway or in a Starbucks store. Shanghai is actually an interesting place, where people always want to find the new fashion and attain modernity. As soon as larger iPhone 6 introduced last year, wealthier Shanghainese (Shanghai people) silently showed off their newly purchased gold-colored iPhone 6 Plus to strangers on the trains and proudly introduced it to officemates. Attaining modernity is probably the priority for them to enjoy their lives and so is holding a Starbucks cup in hand while walking down the street, for instance.
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(L) Inside Apple Store in Hangzhou. Spacious first floor displays popular iPhones as well as other products. (C) Second floor generally offers accessories and lectures offered by Apple staff. (R) On Hangzhou subway, most smartphone users are non-Apple. Reasonable Samsung, HTC, and Xiaomi are still popular out of Shanghai.
Back to Hangzhou Apple Store, when I was exploring the store, there was a cart left right behind the entrance while at least 20 boxes of MacBook Air were just piled on it. I had originally thought those new MacBook Airs were soon to join this store’s inventory but Apple staff never moved that cart for no reason. Soon later, a young lady started to pull the cart to rainy outside to the car just parked on the street. Then, I finally realized that she was a customer, buying up more than 20 MacBook Airs. In the meantime, friendly Apple staff helped her loading them onto the car and saw her off. It is, in fact, a typical Chinese consumer, who purchases a large amount of Apple products in store, rather than online. Of course, she must have been a cooperate customer, who probably took care of organizing an annual corporate party, which was often held right after the traditional Chinese New Year.
Popular Apple products tend to become items for lucky draw winners in the annual party. Many global companies based in Shanghai generously offer such high-end products as prizes to satisfy their employees while it is one of the ways to keep the growth rate of their salaries lower to avoid fast increasing labor cost. One of leading American companies in Lujiazui, the financial district in Shanghai, also offers expensive Apple products for lucky draw winners every year and the rate of winning seems higher as the size of companies becomes bigger.
While Mac users grow modestly in the United States, which is good, Apple may be interested in how rapidly increasing Chinese iPhone users potentially shift their tastes into Mac products as well. As Apple Watch debut is approaching, many articles describe its popularity among Chinese consumers. I myself believe the watch, which easily can be a gift, is going to be a great hit in China. Importantly, Apple Watch can be considered as a modern fashion and that modernity probably attract current iPhone users for an additional item on their wrists. In terms of Mac products, the Chinese consumers are interested in fashionable Mac laptops, but the usage is probably limited in their lives at this moment. Though it is hard to underestimate the purchasing power of growing upper middle-income Chinese consumers, who are always looking for modern high-end products.
Hangzhou Apple Store, one of 12 stores available in China, is unique thanks to its location nearby the historic West Lake and its modern design. While Chinese government is trying to shift its economics structure from an investment- and export-led driven economy into a consumption-led economy, it is one of the places in China that you can experience the purchasing power of growing upper middle-income Chinese consumers although in economic term, buying foreign products, like iPhones, is considered to be an import.
Apple’s Second Quarter Earnings Preview
Apple (NASDAQ: AAPL) is scheduled to report its second quarter earnings about a month from today while the share price is up nearly 15 percent since the first quarter earnings on January 27. Consensus estimates for Apple’s second quarter earnings is currently set at $2.11 per share, compared to $1.60 per share the same period a year earlier or up 32 percent. While its last earnings were up 46 percent compared to the same period earlier thanks to iPhone 6 debut, this coming quarter will be closely monitored once again among investors and analysts. As always, the consensus estimates for Apple are conservative. However, that current estimate should get higher as the earnings day comes closer.
At less than 17 times last twelve-month earnings, the shares of Apple are inexpensive given solid growth driven by iPhones as well as Mac products. Importantly, the growing upper middle-income Chinese consumers should bring higher earnings in coming quarters and beyond. In the meantime, it is very likely that Apple’s sales in China (including Taiwan, Hong Kong, and Macau) would exceed the numbers in Europe next quarter and so forth. Upcoming Apple Watch probably will bring a new modernity to the fashionable Chinese, especially in global cities, such as Shanghai. The Watch may sell well in Asia while health-oriented U.S. consumers are excited to have it on their wrists.
Lastly, Apple is likely to announce dividend payout increase during the second quarter earnings conference. That rate of an increase of the dividend payout would probably hit 15 percent or above followed by a 7 percent increase in 2014 and a 16 percent increase in 2013. As Apple earned the record-high profits last quarter, it is time to return the record-piling cash to investors. Although more than 50 percent of Apple’s cash is known to be sitting outside of the United States, the company will definitely satisfy investors with handsome dividend payouts during the second quarter conference call in the end of April.
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