Mixed Apple earnings cloud outlook for China's Luxshare

(ATF) Anticipation of strong earnings from Apple and other technology giants helped US stocks to bounce back on Thursday from this week’s sell-off.

When Apple released its fiscal fourth quarter earnings after the market close, there was disappointment at its failure to provide future revenue guidance, even though gross sales were higher than analysts had expected.

Revenues in Greater China – including Hong Kong and Taiwan – fell to $7.9 billion, a decline of 29% compared to the same quarter in 2019.

Other technology stocks performed better, with Google parent Alphabet, Amazon and Facebook all beating earnings expectations.

Apple is now the biggest company in the world by capitalization, as well as the most traded stock, which explains why its earnings are so important to broad stock indices.

Apple CEO Tim Cook said that he expected strong demand for the new iPhone 12 range, which has received strong reviews, and this could boost future revenue, as well as production by the company in Asia.

Luxshare could benefit

That in turn could help China’s Luxshare, which is poised to benefit from further moves by Apple to diversify its production in Asia away from reliance on Taiwan-based Foxconn.

Apple shifted some manufacturing from China as the trade war with the US worsened this year, and is reported to be considering a move to spread its regional business more widely.

Luxshare is currently only a fraction of the size of Foxconn, generating roughly 5% of the revenue of Apple’s biggest regional supplier.

But manufacturing or assembling iPhone components and other business from Apple represents an enormous potential revenue pool.

Luxshare saw its sales rise by 75% annually in 2019 and a combination of increased overall demand from Apple and even a minor gain in Luxshare’s proportion of Apple business could result in sharp future revenue gains.

Apple’s supply chain decisions in Asia can be highly politicised as it tries to navigate US-China trade tensions, while also keeping its costs down and diversifying its sources of components without sacrificing quality.

The results of next week’s US election will be important in determining whether any easing in political tensions occurs, though even a Biden presidential victory that is accompanied by Democratic control of Congress is not likely to lead to a swift thawing in relations.

Legal battles over Trump administration attempts to restrict trade with China are also ongoing.

A US appeals court this week rejected a bid by the administration to overturn a stay on its proposed ban of China’s WeChat messaging system in the app stores run by Apple and Google, for example.

Any actual ban on use of WeChat in the Apple app store would reduce the appeal of iPhones for Chinese customers.

But whatever the sales backdrop for Apple products in China, there is still likely to be a greater overall need for manufacturing by the company within Asia.