By Daniel Eran Dilger

Published: 07:00 PM EST (04:00 PM PST)

Morgan Stanley analyst Katy Huberty described China as an "unappreciated" potential growth driver for Apple, setting a $375 "base case" target for the company's stock and a "bull case" scenario where Apple shares could reach $500 by next fall.

The report summarized Morgan Stanley's "increasing confidence in our bull case" by noting that "despite steady upturn since February 2009, we continue to believe investors underappreciate the AAPL growth story, which is driven by one, iPhone market share gains and expanded distribution; two, the iPad market opportunity; three, rising enterprise adoption, and four, the Chinese consumer."

Apple's "aspirational brand" in China

In the report coauthored with Mathew Schneider, Huberty stated, "we see 27% incremental revenue and 44% operating income potential in 2012," based on a variety factors including "China strategist Jerry Lou's view that China is undergoing a 'megatransition' from being the leading producer of goods to the leading consumer of them."

Morgan Stanley also cited "evidence of strong uptake of Apple products among higher-income China consumers from our November 2009 AlphaWise survey," along with recent success demonstrated by BMW, "which we see as a template for Apple's growth. If our numbers are right, Apple then would have to grow revenue by just 19% and operating income by 11% in the rest of the world - a marked deceleration from LTM 43%/37% ex-Asia growth - to hit the current consensus two-year EPS growth forecast of 21% (and our 22%)."

The report also noted that China's "baby boomers" are increasing consumption. "Jerry Lou believes this segment, which will be over half the Chinese population in 2015, will continue to trade up to higher-priced 'aspirational brands.' We expect AAPL to be a key beneficiary of this trend."

The report notes that Apple's brand is "already preferred by urban Chinese: Our Nov '09 survey of Chinese handset users in tier 1 / 2 cities suggests Apple already has greater mindshare among higher-income China consumers than in the US. This population is 3x as likely to own a Mac, 1.7x as likely to own an iPod, and 1.8x as likely to own a Smartphone."

The report added that "Apple held 5% market share of handsets [in China] at the time of the survey, but 31% of surveyed consumers said they’d consider Apple for their next handset purchase, higher than any other brand."

Apple targeting China with large retail expansion

Huberty also wrote that Apple was "on a trajectory similar to BMW China," describing both as 'aspirational brands," that are expanding distribution in China. "Despite the lack of financing and overall lower average income, China will account for 11% of BMW revenue and 17% of OpInc this year, according to our European auto analyst Stuart Pearson, due to a 4x increase in dealers over the past five years. Apple is making similar investments in distribution and is on track to hit similar contribution rates by FY12, in our view."

Apple has significant retail expansion plans in China, with publicly announced intentions to add 21 new stores in China by the end of 2012. The company currently has four; two stores in both Beijing and Shanghai. Apple is reportedly working to open a third store in both cities as well as a new store in Hong Kong.

The company said it intends to open 40 to 50 new retail stores in 2011, making its plans in China roughly 25% of the company's global retail expansion. About half of Apple's new retail stores are expected to open in the US.