Saxo Bank (Saxo Bank)
World markets  |  November 20, 2012 09:36:42

Growth in Chinese wages reducing Apple's margins and limits the scope for further growth of its shares

Risk to which they are exposed Apple shares, increases because wage growth reduces the profit margin of the company. High sales growth no longer means high increase profits. Room for further growth shares of the company is still limited.

Apple recently showcased the incredible growth in sales, profits and margins.Its shares have become the darling of investors, it rated as the world's largest company (market capitalization of more than $ 500 billion). As for the size of the margins are among the most efficient in the technology sector. Of every dollar the company had torn in 2011 Gross profit 44 cents, 35 cents operating and net profit attributable to shareholders 27 cents. These margins can be overwhelming him blindly competitors envy. But these very attractive margins are now endangered. In the medium to long term, however, we can expect pressure to drop. I think that when it comes to Apple's earnings growth in 2013, there is a great risk of disappointment, the cause could be increasing pressure on wage growth in China and the increasing cost of components.

Investors would generally have to be careful, because the shares of Apple, we can not expect only unidirectional movement upwards. If affected by growth in net profit firms, the market in the future will no doubt also the valuation of its shares.

What happens to the gross margin?

However, in the period between March and September 2012 to a sharp decline in gross margins of 47.1% of the company to 38.9%.If we look at the historical development of Apple's gross margins since 2001, we find that in some periods, gross margins increased significantly and the others fell. For example, note the period after June 2007 and December 2009 and March 2012 and period that followed the introduction of brand new products to market. In June 2007, launched the first iPhone, which is unlike anything with the Apple in the meantime arrived. In the spring of 2010, Apple introduced the iPad, which was also a completely new type of product. In March 2012 introduced a new Apple iPad on the market and a little reluctant to give declining gross margins associated with this event.Partly, this effect could be due to greater complexity of the new iPad (cost components) in combination with the fact that its price remained in comparison with the previous model the same. Higher costs for parts but as an explanation for lower margins on their own stand.

Graph 1:Gross and net profit margins of Apple (in%)

Source: Saxo Bank and survey data from FactSet

Apple is now faced with an increase in wages

Personally, I consider wage increases Foxconn, supplier to Apple operating its production in mainland China, the main reason for the current decline in gross margins of the company. At the beginning of 2012, in some factories Foxconn to riots, and the company has become the center of attention in relation to working conditions and wages. Since then there have been several times to increase wages and also in 2013 is going to rise further. These are fairly fundamental changes. In early 2010, the average monthly wage of a worker in Foxconn's approximately 145 USD, and in February 2012, came to more than 340 USD.If the CEO of Foxconn, will keep his word, will take place in 2013 to increase by 100%, taking the average monthly wage per worker almost got to 700 USD.  

Increasing wages costly components of products that according to our calculations, could reduce the overall profit margin of two percent. Consensus in fiscal 2013, the company Apple expects revenue of $ 192 billion, of which should generate a net profit of 47.5 billion USD. This would represent annual earnings growth of 14.1%. But if you fill the above-mentioned assumption that the net margin of a significant part of Bite wages would increase in profits was only 5.7%.


Once investors start to realize that times very cheap Chinese made ??Apple has passed away and that the increase in profits will be significantly lag behind the growth in sales, challenges the current valuation of the shares of the company. Apple is no longer a "sure bet" for the purchase. In the future, we can expect an increase in volatility, as investors no longer in his view of the further development of Apple's shares so united. The failure of growth expectations for popular stocks such as Apple investors are very sensitive.

Supplementary Table: Estimated prices and production costs of Apple products

Bill of Materials (BOM) = total bill for the "components" ... So how much Apple will pay suppliers for the finished product, which was subsequently sold.

Peter Bo Kiaer, strategist and analyst stock markets, Saxo Bank A / S

 Globální online investiční banka

Saxo Bank je globální investiční banka specializující se na online obchodování a investice na mezinárodních finančních trzích. Saxo Bank umožňuje soukromým investorům a institucionálním klientům obchodovat s FX, CFD, cennými papíry, futures, opcemi a dalšími deriváty a poskytuje i profesionální správu portfolia a fondů díky svým online obchodním platformám oceněným řadou různých ocenění.

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