Analysts: Weifeng Liang,Bowen Wu

Sector: Technology Current Price: $ 109.83(As of Nov 3rd)

Market Cap: 591.81B Beta: 1.55 Dividend Yield: 2.01% 52 Week High: $ 123.82 52 Week Low: $ 89.74

63% 11%

10% 5%

11%

FY2016 Revenue Breakdown

iPhone

Macintosh

iPad

Other Products

Services

Hardware 91% Profits

Service 9% Profits

Tons of Profits

General Information

Investment Thesis

Market’s Overreaction

to Recent Negative News is

Creating a Better Buy-in Opportunity

iPhone 7/Plus Sales Potential

and Samsung Note 7’s Recall

Cell Phone Upgrade Demand

& To-be-released

Milestone Product in 10th

Anniversary

Long-term Sales

Growth in China

Driven by Blooming Mid-Class

Recommendation: Strong Buy Target Price: $147 MOS: 25.29%

Investment Thesis 1

Market’s Overreaction Is Mispricing Apple

Is Apple starting to Decline?

Investment Thesis 2 & 3

Strong Cell Phone Upgrade Demands

Sales Units FY2015 FY2016 FY2017 FY2018

iPhone 231,218,000 211,870,000 226,715,880 283,394,850

    YOY% 7.00% 25.00%

Average Unit Price FY2015 FY2016 FY2017 FY2018

iPhone $670.54 645.21 $670 $690

    YOY% 3.84% 3.00%

New Products Will Drive iPhone Sales & Average Unit Price Rising

Investment Thesis 4

China’s Blooming Mid-Class

Assumptions: 1. iPhone Sales Target Group: Affluent, Upper Mid-Class and 50% of Massive Mid-Class 2. iPhone Market Share of China: 15% Known Condition: 1. Incremental Target Group from 2002--2022: 250million households,1 billion Population 2. Average Incremental Target Group Population: 50million Per Year. Results: Incremental iPhone Sales Units: 7.5million per year Scenario: iPhone Revenue Accounts for At Least 60% of Total Revenue Assume Revenue Growth Rate 7%, iPhone Sales Units Have To Increase by 4.2%, Approximately 10million iPhone Sales Units per year. Conclusion: 7% Growth Rate is Reasonable

Incremental Target Group Will Bloom Revenue Growth

Take iPhone as an Example:

DCF Analysis

Future Revenue Breakdown Analysis Sales Units FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

iPhone 72,293,000 125,046,000 150,257,000 169,219,000 231,218,000 211,870,000 226,715,880 283,394,850   YOY% 7% 25%

iPad 32,394,000 58,310,000 71,033,000 67,977,000 54,856,000 45,590,000 37,339,666 30,582,378   YOY% 21.82% -4.30% -19.30% -16.89% -18.10% -18.10%

Macintosh 16735000 18,158,000 16,341,000 18,906,000 20,587,000 18,484,000 18,959,757 19,447,759   YOY% 8.50% -10.01% 15.70% 8.89% -6.11% 2.57% 2.57%

Revenue (in millions)

FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

Services 9,373.00 12,890.00 16,051.00 18,063.00 19,909.00 24,348.00 29,563.19 35,895.44

  YOY% 37.52% 24.52% 12.54% 10.22% 22.30% 21.42% 21.42% Other

Products 4,474.00 5,145.00 5,706.00 6,093.00 10,067.00 11,132.00 13,547.32 16,486.69

  YOY% 15.00% 10.90% 6.78% 65.22% 10.58% 21.70% 21.70%

Revenue (in millions) FY2017 FY2018

iPhone $670/unit $151,900.00 $690/unit $195,542.00 iPad $452.47/unit $16,895.00 $452.47/unit $13,838.00

Macintosh $1400/unit $26,544.00 $1400/unit $27,227.00 Services N/A $29,563.19 N/A $35,895.44

Other Products N/A $13,547.32 N/A $16,486.69 Total $238,449.51 $288,989.13

YOY% 11% 21%

DCF Results

Current Price: $109.83 Target Price: $147 MOS: 25.29%

Assumption: Revenue(2019-2026) Growth Rate: 7% Constant Growth rate: 3% Discount Rate: 11%

6% 6.50% 7% 7.50% 8%

10.00% $160.00 $164.00 $168.00 $173.00 $177.00

10.50% $150.00 $153.00 $157.00 $161.00 $165.00

11.00% $140.00 $143.00 $147.00 $150.00 $154.00

11.50% $132.00 $135.00 $138.00 $141.00 $145.00

12.00% $124.00 $127.00 $130.00 $133.00 $136.00

Sensitivity Analysis

Growth Rate

WACC

Relative Valuation

Key Ratios Comparison

  P/E

FY2015 P/B

FY2015 ROE

FY2015 ROA

FY2015 Finl Lev FY2015

Revenue FY2015

(in million)

Profit Margin FY2015

Gross Profit

Margin FY2015

Apple 13.65 4.69 46.30% 20.47% 1.41 $233,715.01 23.10% 40.10%

Samsung 9.98 0.93 9.75% 7.91% 2.26 $177,404.21 9.32% 38.46%

Industry Average 23.70 3.44 15.22% 8.02% 2.87 $72,224.81 10.92% 38.73%

0

5

10

15

20

25

P/E P/B Finl Lev

Apple Samsung Industry Average

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

ROE ROA Profit Margin

Gross Profit Margin

Apple Samsung Industry Average

0

5

10

15

20

P/B P/E Beta ROA:Y Log Revenue

Regression VS Industry

Apple Industry

P/B P/E Beta ROA Log Revenue

Apple 3.6721 19.9444 1.0301 14.83172 11.33262

Industry 3.337909 11.58833 1.088756 7.460472 10.34025

Regression Analysis

Precedent Transactions

Scenario Median Multiple Implied Price Margin of Safety

Price/Free Cash Flow 14.0376681 138.27 0.192955811

EV/EBITDA 11.98141098 146.86 0.240160697

Price/Sales 2.181178093 87.26 -0.278821912

Median Implied Price 138.27 0.192955811

Risk and Apple’s hedging strategy

China’s Regulatory risk ü  $1 Billion investment in Didi to shore up relationship

with government Apple faces a flattening innovation curve ü Heavy investment in R&D and still staying ahead of the

industry

Services Revenues Are Tied To Device Sales

ü Change of customers’ behavior in emerging markets

Valuation Spread

Margin of Safety Number of Valuations

10% > MOS 2 20% > MOS > 10% 7 30% > MOS > 20% 14

MOS > 30% 8 Total 31

Conclusion

1.  Market overreaction to recent negative news is creating a better buy-in opportunity

2.  iPhone 7/Plus sales potential and Samsung Note 7’s recall

3.  To-be-released milestone product in apple’s 10th anniversary

4.  Growth prospects in Chinese market

We recommend a strong buy of Apple with a target price of $147 and a margin of safety of 25.29%