While Apple’s (NASDAQ:AAPL) brand is as different from Hewlett-Packard’s (NYSE:HPQ) as one technology company can be from another, the two device manufactures have a shared experience: being the target of a smear campaign conducted by the Chinese government. With the accusations of discriminatory customer service practices raining down from the People’s Daily — the Chinese Communist Party’s official mouthpiece — and state-run China Central Television for three straight weeks, Citigroup analyst Glen Yeung has turned to HP as a template for calculating the potential costs the state-sponsored propaganda campaign could have on Apple.
One cost is already clear; in his assessment, Yeung wrote in a note seen by Fortune that this negative publicity — regardless of whether it is deserved — adds another weight to Apple’s current burden, giving him further reason to reiterate the brokerage’s Neutral rating on the company’s stock.
Apple is not the first company to be targeted by such a campaign. Yum Brand’s (NYSE:YUM) experienced a 20 percent year-over-year drop in sales after Chinese television broadcast an investigative report about the poultry used by its KFC restaurants last December, and Toshiba (TOSBF.PK) fell out of its number one position in Chinese notebook sales after the media reported in 1999 that the manufacturer employed different policies for Chinese and American customers.
The propaganda used against HP in 2010 decimated its business in China. In his note, Yeung indicated that Apple could suffer a similar fate:
“Recall that a similar campaign hit HP in 2010, leading to a ~50% reduction in their PC share in China. Apple derives ~16% of its sales in China (CY12) and China accounted for ~24% of Apple’s revenue growth in the past 2 years (2010-2012). If Apple were to lose as much as 50% of their China market share, this would equate to ~$13.1B/$3.62 in revenues/EPS. We add this to our list of concerns about Apple’s market share dominance and still do not recommend the shares at this time.”
This statement is consistent with the generally bearish tone that has characterized Citigroup’s coverage of Apple since the departure of analyst Richard Gardner. That sentiment is apparent in Yeung’s description of the negative effects that China’s media campaign could have on the company. “While bulls remain stubbornly optimistic about Apple’s opportunities,” he stated, the attacks undermine Apple’s ability to strike a deal with China Mobile (NYSE:CHL) — a partnership that would significantly expand the iPhone maker’s market share in China.
The problems Yeung anticipates are long term. “More importantly, however, we believe the undermining of Apple’s brand value can have a more insipid and long-lasting impact,” he added.
With the ongoing smear campaign increasing investors’ concerns over Apple’s market share in China, shares appear to be headed for their fifth straight day of losses. The stock dropped as low as $433.30 in mid-morning trading, a decrease of $9.36 — or 2.1 percent — from Friday’s close.
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