China risks for Apple (NASDAQ:AAPL) are real and appear to be increasing, Bank of America said on Tuesday.
Apple (AAPL) remains heavily dependent on the country, with the highest risk centering around production, policy and domestic demand, analysts led by Wamsi Mohan wrote in a note. The firm maintained its Neutral rating and $208 price target on the tech giant.
Shares of Apple (AAPL) were little changed in afternoon trading.
Production risk is the hardest to diversify from, Bank of America said. Around 7% of iPhones are made in India, which could increase to 20% to 30% over the next two years, the bank estimates. About 30% to 40% of Apple Watch and AirPods are made in Vietnam, which could rise to 50%.
“Although assembly is moving to other regions, the supplier base remains largely in China, which makes it hard to move all elements out of China,” Bank of America said. “Over time we expect Apple to incorporate more vertical integration and system on chip designs to enable higher automation in assembly.”
The bank lauded Chief Executive Officer Tim Cook for managing China policy risk well.
“Cook has navigated these challenges in an extraordinarily nimble fashion,” the analysts said.
“China could create many headwinds including around production, demand, competition, etc,” the analysts explained.”While competitive risk is easier to quantify, the other risks can be very fluid and would need to continue to be managed well.”
China represents more than 20% of Apple (AAPL) revenue. Despite competitive risks rising, sales of wearables, including the Watch and AirPods, have created a “stickier ecosystem in the country, which is helping to overcome some of the challenges associated with a traditionally less sticky ecosystem (use of WeChat vs. iMessage).”
Separately, Bloomberg reported the company will redesign its TV app to consolidate its video offerings. The move is being made to become a bigger player in streaming, the outlet reported, citing people with knowledge of the matter.