CNBC

An all-out ban on Apple products in China could wipe out almost 30% of Apple's profits, Goldman Sachs analysts estimate.

The report comes as the market anticipates a further escalation of the ongoing US-China trade dispute.

Apple shares fell nearly 2% on Wednesday.

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Apple's profits would plunge by almost 30% if China enacts a total ban on the company's products, according to Goldman Sachs. The dollar amount would be a reduction in net income by over $15 billion annually.

According to Goldman Sachs analyst Rod Hall, China represents 17% of Apple's revenues, but 29% of the company's profits due to the high-margin products sold there. Given the product mix, Goldman assumes Apple has a 45% gross margin.

Wednesday's report comes on the heels of increasing trade tension between the United States and China. Earlier this month, President Donald Trump raised tariffs on $200 billion of Chinese imports after negotiations failed to secure a deal. Further, Trump noted there was potential to raise tariffs on an additional $325 billion of goods should no deal be reached.

And this week, the president laid the foundation for a ban on the Chinese telecom company Huawei sourcing components from US firms such as Google and Qualcomm. These actions led to significant stock-market volatility, with tech stocks dropping on news of the ban and later stabilizing after it was announced the ban would be delayed.

A response is expected from the Chinese government, potentially further rattling markets.

"Investors have been asking us about Apple's financial exposure to China given the possibility of a ban on Apple's products there in retaliation for the US license requirements for Huawei that were announced last Friday," wrote Hall in the research note.

Beyond the trade dispute, Apple is facing significant headwinds in China with demand for its phones falling alongside increased competition from cheaper smartphone makers such as Huawei and Xiaomi. In January, Apple issued its first sales warning in more than a decade, citing a sharp and unexpected drop in iPhone sales in China.

In the Goldman report, Hall also noted there were additional risks for Apple should the trade dispute escalate further. Most notable, is that most of the company's iPhone production facilities are located in China.

"Should China restrict iPhone production in any way we do not believe the company would be able to shift much iPhone volume outside of China on short notice, though actions that would push Apple production outside of China could have negative implications for the China tech ecosystem as well as for local employment," the report said.

Apple was down nearly 2% on Wednesday, but still up 16% this year.

Markets Insider

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