“Kill the chicken to scare the monkeys.”
From a note to clients by analyst Amit Daryanani that landed on my desktop Friday:
All You Need to Know: Western companies operating in China are once again generating headlines for their response (or lack thereof) to the ongoing Uyghur genocide in Xinjiang. The EVR ISI China team (lead by Don Straszheim) notes that the recent very aggressive action against H&M are likely an attempt to scare larger companies like Nike and Apple (see: Kill the Chicken to Scare the Monkeys).
Apple in particular is drawing some scrutiny today after a story out of the Information noted Apple is hosting apps made by a Chinese Paramilitary organization that is blacklisted by the US for its role in the genocide. Apple issued a statement that it has reviewed the apps and determined that they are in compliance with US law. There is some concern among investors that Apple will make a statement that could be perceived negatively in China.
We think given the impressive management by Mr. Cook through the Trump presidency and hostile China relationships there is a high probability that AAPL manages through these real or perceived issues fairly un-impacted. In the past, Apple has avoided removing apps from blacklisted companies until they were forced to do so by the Treasury Department. Removing the apps under legal order from the Treasury Department is unlikely to spur much anger in China. Also, worth noting AAPL and its ecosystem are a sizable employer within Mainland China, making it crucial for both sides to maintain cordial relationships.
Net/net: We think AAPL remains well positioned to deliver sustained mid-teens EPS growth over the medium term and think the risk of H&M like backlash would be unlikely and low probability event for AAPL.
Maintains Outperform rating and $175 target.
My take: In this parable, Nike is more likely than Apple to play the part of the monkey.