China: 1.3 billion people, 10% annual GDP growth, low levels of debt, and a rapidly growing middle class. If there exists a more exciting consumer market at the moment, I haven’t seen it. Forget for a moment whether China will experience a slight slowdown of its astronomical growth in the upcoming years, or whether the recent real estate bubble will deflate in what should be a very controlled fashion considering the government’s large reserves and commitment to stability. No matter what, China’s growth will remain leaps and bounds above that of any Western countries, its economy will continue to gain importance over the next decade or two, and its population's living standards will continue to improve dramatically.

My personal experience

I lived and worked in China for a year and half between 2010 and 2011 and got a first-hand look at this incredible country and its booming economy. The insights I gained were invaluable and I would gladly go back if the opportunity presented itself. The opinions I present in this article are reflections of my personal experiences in China. They are not meant to be stereotypes or generalizations in any way.

When I worked in China, I always kept an eye open for investment opportunities. Strangely enough, even after over a year there, I still had not found many Chinese companies in which I would invest with confidence. Too high were the valuations, too frequent the accounting scandals, too intense the government interference in many of the firms I considered. Sure, I had a short list including BIDU, NTES, SINA, and CTRP, but none of them could fully convince me. Nevertheless, I picked up a few shares of SINA hoping that the tremendous growth and importance of their Weibo microblog service (Chinese equivalent to Twitter) would somehow translate into outsized investment returns. Needless to say, that bet did not work out as well as I thought, and I am down about 40% by now.

But there was one company that was absolutely everywhere in China, whose brand carries huge value in China, and whose products are not only in incredible demand but also within reach of most Chinese middle class consumers.

Yes, you’ve guessed it: That company is Apple (AAPL).

You think American Apple aficionados are crazy in terms of their brand loyalty and commitment to always buy the latest gadgets, even if it means camping outside of the Apple store the night before the newest products are released? You should go and visit some of the Apple stores in Shanghai, Beijing, or even Hong Kong. Over the past year or two, these stores have broken all worldwide records in terms of not only customer count but also sales volume. Chinese consumers are crazy for iPhones, iPads, and anything related to Apple. This incredible demand for Apple products in China has been reflected in the company’s regional breakdown of sales and income over the past three years:

(Source: Apple Inc. 2011 Form 10-K)

While the company’s net sales and operating income have grown significantly overall, the above numbers clearly show the growth and importance of the Asia-Pacific market, of which China is by far the largest component. While all other markets stayed flat or saw a decreasing share, Asia-Pacific’s share of Apple’s net sales rose from 7% in 2009 to 21% in 2011. YoY growth in Asia-Pacific net sales was a staggering 160% and 174% in 2010 and 2011, respectively, while YoY growth in operating income was a similarly astounding 232% and 163%, respectively, over the same time period. No other region came even close to these figures!

Looking to the future

The incredible growth in China that Apple has witnessed throughout the past years is by no means coming to a halt any time soon. As of the time of this writing, Apple still only operates six official Apple Stores in Greater China: three in Shanghai, two in Beijing, and one in Hong Kong. Compare that to almost 250 stores in the US (for 300 million people or about ¼ of China’s population) and you understand the immense growth potential of Apple in China.

From my personal experience in China, I have identified several drivers of future growth that may be overlooked by many analysts who continue to warn over a coming slowdown in the Chinese economy.

First, Chinese consumers are quite different from consumers in the US or Europe. The concept of “face” (or reputation) is much more prevalent in China and greatly influences purchasing decisions. While consumers in the US actually weigh the costs and benefits of rival products from HTC or Samsung before making their purchasing decisions, these options are much less established in the minds of most Chinese consumers. Since “face” is so important and Apple provides by far the most prestige, Chinese consumers will almost always buy Apple as long as they can afford it. Few Chinese who care about their image would like to be seen with a “lesser” gadget when all of their friends and acquaintances are using shiny new Apple products.

Second, Apple products are priced almost to perfection in China. They are expensive enough to make them desirable and objects of prestige and luxury, but still cheap enough to be affordable by large and increasing parts of the population. Chinese middle class consumers usually cannot afford to buy a home at the moment due to the bubble in real estate prices, and other large purchases such as cars may also still be out of reach, but the moment they have a sufficient amount of disposable income, they will go out and buy the latest iPhone or iPad. I witnessed this first hand with my employees in China, many of whom showed up with shiny new Apple gadgets the day after we paid them their annual bonuses.

Last but not least, even if Chinese economic growth slows a bit (only in China does 8% GDP growth sound like a recession!) and/or the real estate market comes back to more sustainable levels, I do not believe that it will affect Chinese middle-class consumers as much as some analysts seem to expect. Much of China’s GDP growth is driven by government/infrastructure investment, not consumer spending. Similarly, the people who will be most affected by a downturn in real estate are higher-income individuals, who will still have plenty of funds to purchase iPhones even if they lose money on their real estate holdings. I believe the Chinese middle class is much more robust than many analysts expect. Their personal savings rate is much higher than those of the "Western" middle classes, and similarly Chinese consumers are not nearly as highly levered (i.e. drowning in debt) as, for example, US consumers were in the mid-2000s (and still are, to some extent).

Summary

You don’t have to live or work in China to profit from its economic rise. You don’t even have to know anything about Chinese companies, the way they do business, or the best way to invest in them. You also don’t have to bear the risk and volatility that is usually involved with investing in Chinese stocks directly. No, the solution is much simpler: An investment in Apple will not only give you a stake in what I consider to be one of the best-run, most profitable, and most revolutionary companies of our time, but it will also give you great exposure to the growth in China without many of the risks.

China’s growth remains strong, Apple’s story in China remains strong, and AAPL remains a strong buy in my book!