Coming soon: 4-5 million Chinese iPhones

A survey of high-end Chinese buyers suggests the Street has underestimated demand

Morgan Stanley's Katy Huberty -- a long-time Apple (AAPL) bear who seems to have switched her drink to Kool-Aid -- issued an optimistic report Friday about the Chinese market for iPhones. It includes scenarios by which she sees Apple's share price hitting $325 to $435 within a year.

(The stock closed at $199.29 Thursday, down more than 4% for the day, and then fell another 3.36% on Friday.)

Central to Huberty's "Bull Case" is a scenario in which iPhone sales -- which got off to a famously disappointing start in China -- hit a cruising speed of 4-5 million units per year and then accelerate dramatically when and if Apple introduces a lower-cost phone with a pre-paid plan.

Her findings are not that different from those of other China watchers, but they are probably based on better data -- the results of a survey of 1,050 Chinese consumers representing what calls "the core iPhone addressable market in China."

Huberty's key findings:

1. The current installed base of unlocked iPhones in China (2 million) is already similar to the largest European and Asian countries, pointing to strong underlying demand at the high-end of market.
2. We see an attractive addressable market in China of 50 million consumers, with strong interest in smartphones and the Apple brand.
3. The survey indicates the potential for Apple to sell 4-5 million units annually in China over time.
4. Importantly, we believe there is an opportunity for Apple to increase demand by 100%+ by introducing a lower-cost, pre-paid device and still generate 45-50% gross margins.

The report is supported by an array of charts, graphs and spreadsheets focused on that addressable Chinese market -- a population of about 50 million people (4% of the population) with an annual income over $20,000 and an average cellphone bill of $22 per month.

It's a market, she maintains, comparable to the U.K. (76 million) and Spain (53 million) -- with a difference:

"Importantly," she writes, "this 50M person addressable market has high smartphone and Apple product penetration rates relative to the market as a whole, according to our survey. We believe the survey responses indicate the interest and affinity for smartphones and the Apple brand among the high-end segment of the population in China."

Below: A selection of those supporting diagrams.

See also:

• China Unicom: 300,000 iPhones sold
• China: 100,000 iPhones in 40 days
• iPhone hardball and soft sell in China
• China iPhone launch a 'disappointment'
• Inside Beijing's iPhone black market

[Follow Philip Elmer-DeWitt on Twitter @philiped]