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Apple returns to growth in China as trade risks loom

Krystal Hu

Apple’s business in China, the tech giant’s second-largest market, is bouncing back after a dramatic downturn since late 2018, boosting analysts’ outlook for the Cupertino, Calif-based iPhone maker.

Sales in mainland China returned to growth mode in the quarter ending June 30, the company said during its earnings call on Tuesday. Revenue in the Greater China region (mainland China, Hong Kong, Taiwan) reached $9.2 billion. Despite a 4.1% decline year-over-year, Apple (AAPL) said sales are actually growing in constant currency, which excludes the impact of a strong U.S. dollar. This marks a sharp recovery from the 22% drop in revenue in the last quarter, and much better than what analysts feared.

The recovery in China is a major contributor to Apple’s iPhone revenue growth in the most recent quarter, analysts at Morgan Stanley said. Since late 2018, Apple has taken extensive measures to help lift iPhone demand in China. It has launched trade-in and financing programs that allow customers to trade-in Android phones in exchange for iPhones. Apple said the number of iPhone trade-ins this quarter is five times over a year ago.

“I think ultimately the death was greatly exaggerated here,” Dan Ives, Wedbush analyst, told Yahoo Finance’s On the Move, referring to iPhone sales in China. “And what you saw was sort of inline numbers.”

Apple also lowered the price for channel distributors in China. After the government cut the VAT tax from 16% to 13%, Apple further reduced the price of iPhones in its official stores. By offering better value and price, Chinese consumers are interested in buying iPhones again.

China now represents 17% of Apple’s global sales, down from about 20% in 2017. As Huawei, Apple’s domestic rival, dominates over a third of the smartphone market in the country, analysts are waiting to see if Apple could persuade more consumers to upgrade their iPhones in the next quarter, for which the company has offered optimistic revenue guidance of $61 billion and $64 billion.

Growth in iPad sales and services

While the iPhone may be no-longer red-hot as it was, Apple has found other growth areas in the world’s second-largest economy. iPad revenue hit a record high in Mainland China, and more than 50% of iPad purchasers worldwide during the quarter were first-time buyers.

Services, another selling point in Apple’s growth, grew 13% year-over-year to $11.5 billion. Analysts believe its services unit was aided by a recovery in the China gaming business, as the government recently started granting new game licenses after a quiet period.

The last time Apple saw a revenue downturn in the China region was in 2016, which lasted for six straight quarters, according to BAML data. It remains to be seen if Apple will be able to turn around faster and maintain the recovery trend this time. Ives believes the growth outlook in China, where the iPhone maker has about 60 to 70 million upgrade opportunities, is the biggest risk for Apple.

“If China doesn't see a rebound, which we start to see, and ultimately the U.S.-China UFC battle— that trade issue starts to get worst, that continues to be the the dark risk in the name,” said Ives, who raised his price target for Apple to $245 on Wednesday. “$20 and $25 of an overhang has been on Apple, because it's the poster child for the U.S.-China trade war.”

Krystal Hu covers technology and China for Yahoo Finance. Follow her on Twitter.

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