Chinese smartphone makers may be gaining more market share in their home country, but Morgan Stanley still thinks Apple Inc. (AAPL) will have a strong showing in one of the most important handset markets in the world.

Citing Jigaung, a Chinese company that gathers data from push messaging, Morgan Stanley analyst Katy Huberty said the data shows the Cupertino, Calif., technology company increased its number of active users in China with it rising 19.5% as of November. That compares to Chinese phone makers who saw a 14% uptick in their active user base.

In January, Apple’s share of active users stood at 15.5% while the Chinese handset makers had 13.1% of the active user market, the analyst said in a research report covered by Barron’s. The data from Jigaung also shows that in the four weeks that ended Oct. 22, more consumers left their Chinese branded smartphones for an iPhone than iPhone users left for a Chinese-brand handset. Apple’s switching rate increase to 7.6% from 6.7% in the year-ago October time frame.  (See also: Apple Scrambles to Fix Major Security Flaw.)

Data Discrepancy

The analyst did point out that there is a contradiction when you compare active user data with shipment data, given Apple has lost market share in China from a shipment perspective at the same time that Chinese handset makers shipments have increased. She said that’s the result of a buildup of inventory on the part of Chinese handset makers and not because of final sales to customers. (See also: Why Apple Could Reach $1 Trillion Next Year.)

“We've read reports and heard from component suppliers that have highlighted that Chinese smartphone vendors have been building meaningful channel inventory of inactivated smartphones,” wrote Huberty in the note to clients. “More importantly in our view, Chinese-branded smartphones have a shorter replacement cycle vs. Apple, suggesting they have to sell more phones to achieve the same share of activated smartphones. We believe the more accurate indicator of vendor strength and potential upgrade demand in China is active smartphone market share, where Apple gained leading up to the iPhone 8/X launch.”

The analyst said the number of iPhones in China that can be upgraded is 56% higher than in 2015 when the iPhone 7 was launched. As a result, she thinks China could represent 74 million iPhone units in fiscal 2018, which is a lot higher than the 41 million unit sales in China for the fiscal year ended in September. Huberty has an overweight rating on Apple and a $200 price target. At Thursday’s closing price of $171.85, the analyst thinks the stock can gain an additional roughly 16%.


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