A SHARP drop in Apple Inc's China revenue in April-June underscores the challenges it faces in its second-largest market as the technology gap with cheaper local rivals narrows and as Samsung Electronics keeps up a steady stream of new models across all price ranges.

While investors marked up Apple shares as the company sold more of its iPhones than expected, the stock rally may prove short-lived as demand for its products fades in China. Analysts predict Apple will lose market share in the world's leading smartphone sector.

"There's some cannibalization of Apple's market share from competitive mid-tier models that cost a lot less and perform as well, from vendors such as Xiaomi and Vivo," said Huang Leping, an analyst at Nomura in Hong Kong, referring to rival Chinese models.

In the first quarter of this year, Apple ranked top in Hong Kong with 46 percent market share in smartphones, though that was down from 54 percent in the last quarter of 2012, according to market research firm Canalys.

Even without releasing a new product, Apple sold 31.2 million iPhones in its fiscal third quarter, around a fifth more than analysts had predicted. But revenue from all Apple products in China slumped 43 percent from the previous quarter and was down 14 percent from a year earlier.

China accounted for 13 percent of Apple's sales, or US$5 billion, in April-June - down from nearly 19 percent in the previous quarter.

In the first quarter, Apple ranked fifth in China with 9.7 percent market share, well behind leader Samsung with 17.7 percent.