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Goldman Defends Apple Following Underwhelming Product Announcements But Another Problem Emerges

As we documented, and annotated (if not with an Apple pencil yet) the market's reception of AAPL latest convocation for the faithful was less than enthusiastic, pushing the stock to close near its day lows after a flurry of product announcements that led many to wonder if the Steve Jobs creative magic is now officially dead:

 

However, with AAPL still the most important stock in the world for the largest number of hedge funds, not to mention the biggest by market cap, the sellside banks felt compelled to immediately defend it and halt any further bloodshed (even as AAPL is doing all it can by issuing about €2 billion in EUR-denominated bonds in a 2 part deal today whose proceeds will be used for buybacks).

This is what Goldman said:

A broad refresh, with several key platform enhancements

 

What's changed

 

Apple announced several new products and updates at its September 9 event in San Francisco, CA, including the iPhone 6s and  iPhone 6s Plus, the iPad Pro, a new Apple TV, and a series of enhancements for the Apple Watch. Apple is also offering a new iPhone upgrade plan starting at $32 a month, whereby users can finance an iPhone with AppleCare+ and return the phone for a new model every year; while we are not changing our iPhone estimates at this time, we believe this program may eventually lead to higher iPhone sales as replacement cycles could compress.

 

Implications

 

Overall, we were encouraged by the event’s announcements, and we were perhaps the most positively surprised by the enhancements to Apple TV and by the introduction of tvOS. There were no major surprises with the new iPhone cycle, which is typical of an “s” device; with that said, as we have argued several times, the “s” cycle is more likely to surprise on gross margins rather than units. We are somewhat skeptical that the newly-announced iPad Pro will be able to stimulate overall iPad demand— consumer weakness continues to outpace commercial adoption—but we believe the enterprise-centric iPad Pro is a step in the right direction. We are not changing our model at this time, although we present a series of sensitivity analyses in the body of this report. We remain bullish on Apple stock and we reiterate our Buy rating.

Of course, with Goldman's desk making millions in commissions executing AAPL's weekly, if not daily, buyback orders, the last thing Goldman would dare to do is issue a report that angers Tim Cook.

But another problem may be emerging for AAPL: China. As a reminder, China recently became the biggest end-market for iPhone demand and any hints this may be jeopardized could have severe repercussions on the stock price.  Which is why we paid particular attention to a report overnight from China's finance ministry, which accused a China unit of Apple of underpaying taxes in 2013 by 452 million yuan ($71 million), "which comes as China toughens its stance on tax payments by foreign firms."

Xinhua has the details:

Apple Inc.'s computer subsidiary in China failed to pay 452 million yuan (more than 70 million U.S. dollars ) in due taxes by the end of 2013, an official accounting inspection report showed on Wednesday.Apple Computer Trading (Shanghai) Co. Ltd. included maintenance costs into pre-tax deductions, wracking up the giant deficit, the Ministry of Finance (MOF) said in the report. But the company has paid back the taxes and 65 million yuan in late fees.

 

The firm also under-reported 8.8 billion yuan of revenue and 3.45 billion of costs and overstated 5.35 billion yuan of profit, the report showed.

 

The problem was disclosed along with violations of rules in other state-owned, private and foreign companies after the MOF inspected on accounting information for tens of thousands of firms across the country.

More from Reuters:

The Ministry of Finance (MOF) report, dated Sept. 9 but cited by official news agency Xinhua on Thursday, said Apple Computer Trading (Shanghai) Co Ltd had already repaid the taxes as well as paying 65 million yuan in late fees.

So while AAPL may be out of the woods in this case, the report and the investigation, "underlines an increasingly hard stance being taken by Beijing against foreign firms underpaying taxes after authorities said in December last year that they would crack down on the practice. Apple officials in China did not respond to phoned and emailed requests for comment."

Worse, the finance ministry report said the Apple subsidiary had understated its revenues by 8.8 billion yuan and its costs by 3.4 billion yuan. It had also overstated its profits by 5.4 billion yuan.

And considering the recent financial relations between China and the US have been anything but without blemishes, the question on everyone's lips is whether the currency war will progress to their next evolutionary phase, namely trade wars, and will the biggest symbol of former China-US symbiosis, i.e., AAPL products, be the next casualty in what is becoming an increasingly more hostile relationship? For the answer, keep an eye on upcoming channel checks - if recent history is any indication, AAPL's troubles in China are only just starting.