China smartphone shipments slumped in June on inventory overhang: Jefferies

China's smartphone shipments fell for a second consecutive month in June, declining 14% year-on-year, driven by significant drops in iPhone volumes (-31%) and local brands (-11%) amidst high inventories and weak sales, according to Jefferies. While Apple regained some market share via targeted discounts and Huawei posted an 18% growth due to aggressive pricing, overall market sell-through still slipped 1% in June. Jefferies anticipates the broader industry recovery only by Q4, suggesting continued pressure for most local Android brands, and maintains a preference for Apple's supply chain.

Analysis

China's smartphone market demonstrated continued weakness in June, with shipments declining 14% year-over-year, following a 21% fall in May, according to a Jefferies report. This contraction is attributed to weak consumer demand meeting high inventory levels, which had been built up in anticipation of a government subsidy program. Apple (AAPL) experienced a significant 31% drop in its iPhone volumes, though it managed to regain market share by implementing targeted discounts. In stark contrast, Huawei was the only major brand to post growth, with an 18% increase in shipments driven by aggressive pricing. The rest of the Android market, excluding Huawei, saw volumes fall by 4%. While industry-wide inventory has shown signs of easing, falling by approximately 15 days in the last six months, a broader market recovery is not anticipated by Jefferies until the fourth quarter. Consequently, non-Huawei Android brands are expected to face persistent pressure through Q3. Despite the negative headline figures for Apple, Jefferies maintains a preferential view on its supply chain, identifying specific component makers like Luxshare Precision and Lingyi iTech as likely beneficiaries of new product features.

Key Decisions for Investors

• Investors in Apple should note the significant 31% volume drop in the key China market, but also recognize the company's ability to defend market share through strategic discounting, making margin impact a key metric to monitor in upcoming earnings.
• Considering the forecast for continued weakness in the Chinese Android market until Q4, exposure to non-Huawei Android brands and their specific supply chains carries elevated risk in the near term.
• A potential strategy is to adopt Jefferies' 'look-through' approach by evaluating positions in key Apple suppliers, which may benefit from new product cycles and features, potentially offering a more resilient investment than the broader smartphone market itself.