As Apple Reaches New Highs, The WeChat Ban Risk Looms
Summary
- The WeChat ban could impact up to ~$28 billion in iPhone/iPad sales in China as well as related impacts to Service revenue.
- The executive order only targets WeChat, although it does mention aggressive action against Tencent, potentially putting Weixin and QQ under fire.
- Apple could face up to a 10% decline in revenue if 75% of iPhone and iPad sales disappear.
Trump's announcement of a potential ban on WeChat and TikTok by September 15 could have serious ramifications if that ban is enacted. Apple's (NASDAQ:AAPL) ecosystem is facing what could be an unprecedented shake-up, assuming the Trump administration enacts the ban and forces a removal of WeChat (and maybe sister app Weixin) from international App Stores in the worst-case scenario.
China is Apple's third largest market, amassing about $44 billion in net sales for 2019, down from $51 billion in 2018. The ban puts the Chinese market for Apple devices, primarily iPhones and iPads, at high risk if a full crackdown occurs.
President Trump is quite known for saying something outlandish, only to never act upon that statement and later act like it really never happened. There's potential that this 'ban' of WeChat and TikTok was simply a mirror threat, and that nothing will actually happen come mid-September; if that's the case, there's not much to worry about. But if he does act upon this statement, the risk to Apple grows.
Apple's FY19 revenues were down ~$5 billion YoY, due to lower net iPhone sales in Europe and Greater China (China, HK, Taiwan). For FY20, trailing nine months revenues show Europe up $6 billion YoY and Greater China flat YoY.
Apple attributed this "primarily to lower net sales of iPhone, partially offset by higher net sales of Services and Wearables, Home and Accessories." But much of the decline in sales came from the pandemic, and not from the fiscal Q3; sales in China for Q3 saw 32% YoY growth to 7.4 million iPhones, just a fraction of Huawei's 36.6 million phones (+14% YoY).
China is still a very important market for Apple products - as the third largest revenue driver and the second largest contributor to net income on an operating margin basis.
While China's net sales only hit $9.329 billion for Q3, operating margin for the geographic region was 36.59%, far higher than Americas' 29.51% operating margin. Not only is Apple facing potential losses in a $45 billion annual market, but it's also putting at risk up to $16.5 billion in operating income contribution from the Greater China region.
But a ban would not evaporate all of that $45 billion contribution to revenues, as iPhone sales only accounted for ~54.7% of Apple's $260 billion revenues for FY19. iPad sales could also be threatened by the ban, adding another ~8.2% of revenue contribution.
Assuming ~62.9% of revenues in China come from iPhone and iPad combined, that's only putting ~$28.3 billion in net revenues at stake (assuming those categories drop to zero sales) from new device sales, as services, home and wearables would be relatively unaffected materially by a ban (effects would come through association to Apple and a pull-through from potential losses in device sales).
But that's also quite unrealistic, to assume that iPhone and iPad sales in the Greater China region will drop to zero under the worst-case scenario that WeChat is removed from global App Stores. Global sales would be affected slightly as well, with Europe posing a larger threat of losses to iPhone sales than Japan and Asia Pacific due to the differences in revenue sizes.
If 75% of iPhone/iPad sales in China vanish because of this, that estimates a decline of ~$21 billion in net revenues aside from a related drawdown in services, which could add $4-5 billion to that decline estimate.
If 50% of iPhone/iPad sales vanish, that would estimate a decline of ~$14 billion in net revenues, and services associated could add another $2-3 billion to that decline.
Those are just rudimentary estimates based on the mix of iPhone/iPad and service revenues compared to overall revenues, but under those, only ~10% of annual revenue would vanish in a scenario of 75% of iPhone/iPad sales disappearing.
However, the executive order only mentions WeChat, the international version, while Weixin, the Chinese version, is unaffected. Therefore it seems that only the international version WeChat will be targeted, instead of the Chinese version Weixin - that potentially reduces the scope, as mainland China users could still use Weixin if there is no need to communicate internationally.
But WeChat/Weixin is huge from a user standpoint, and is much more than just an app for messaging. Combined MAU rose 6% YoY to 1.21 billion for the most recent quarter, a whopping 15% of the world's population; yet it's likely that a majority of the MAU comes from Weixin.
Aside from messaging/social media capabilities, WeChat/Weixin facilitates "buying goods and services, transferring money, planning holidays, contacting customer support, marketing purposes, and a lot more." It's a lifeline for both individuals and corporations that's in the works of facing potential destruction.
If the ban does come to cover Weixin as well, there still remains an alternative messaging platform, QQ, also run by Tencent (OTCPK:TCEHY). MAU for QQ hit 648 million from the most recent quarter, just over half the MAU for the WeChat/Weixin pair.
Based on the executive order, only WeChat is mentioned, so Weixin and QQ look unaffected as of now; but because the order does mention "aggressive action against the owner of WeChat to protect our national security," those two could quickly fall under scrutiny - which would most likely elicit the worst-case scenario.
Another issue arises in an only-U.S., only-WeChat ban scenario, as those using WeChat domestically to chat with international friends, family, business partners, etc., would then have to switch to either an alternative app like QQ or others, or switch to Android OS if that remains unaffected.
While that could "cut 3-6% of iPhone shipments" according to Ming-Chi Kuo, it runs the risk of snowballing into a larger decline in shipments if further measures are taken, or if the affected user base is larger than estimated from a domestic ban - it could run up to tens of millions.
From a developer's (Tencent) standpoint, an app removed from the App Store "will remain fully functional for current users. They will experience no interruption to services and will still be able to buy in-app purchases." So that's a positive for users who already have WeChat downloaded, which looks to have soared since the ban was announced.
From a customer standpoint, "[a]fter you download an app on one device, you can't redownload it on another device if there isn't a version available for that device. For example, you might not be able to redownload an app for your Mac on your iOS device." Hence why "WeChat app downloads in the United States rose 41% in a six-day average" after the ban was announced. Downloads also soared in encrypted app Signal, in both China and the U.S., while downloads of QQ tripled.
The proposed ban puts Apple in a compromising spectrum - one end where it faces the potential loss of a majority of revenue and customer base in the Chinese market, its third largest, if an all-out ban does occur (including Weixin), and two, that nothing occurs with the ban aside from increased scrutiny of apps like WeChat in the future.
Time will tell, but the projected downside risks to Apple only look significant if WeChat's sister app Weixin and other apps like QQ are involved in due time. WeChat is more than mobile messaging; it's absolutely vital to the Chinese citizen and expat in daily life. Removing this would definitely have an effect on international relations as well as business relations with Apple and other global businesses.
Based on product revenue mix, iPhone and iPad sales are the most threatened by the ban, with that accounting for ~$28 billion annually in China. Services would face a pull-through effect if sales there decline, as less devices equal less service needed.
However, it seems very unlikely that those category sales will just simply drop to zero; while customers could simply switch to a different OS on phones from Huawei, for example, Apple is likely to still have some share in the market due to customer preference and tie to the Apple ecosystem. With that in mind, Apple might only be facing a potential ~10% decrease in revenue, which could be offset by the launch of the iPhone 12.
Apple will have more risk tapered to its name due to the nature of the ban and the potential for damaging effects to revenues in China and globally. Revenue downside could reach double-digit declines in worst-case scenarios of global WeChat bans/removal from App Stores, or possibly paired with a subsequent ban on Weixin/QQ due to overarching similarities. Apple's attempt at pushing new highs and securing a coveted $2 trillion valuation could be threatened under these scenarios, although the possibility that no ban occurs, or a successful launch of the iPhone 12 could propel optimism forward.
This article was written by
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