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China just gave Apple's biggest suppliers a welcome surprise

Tuesday, August 11, 2015 - 15:59
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Apple Inc suppliers Hon Hai Precision Industry Co and Pegatron Corp will benefit from a surprise devaluation in China's currency because both pay a major share of their workforces in yuan and sell in US dollars.

[TAIPEI] Apple Inc suppliers Hon Hai Precision Industry Co and Pegatron Corp will benefit from a surprise devaluation in China's currency because both pay a major share of their workforces in yuan and sell in US dollars.

China's central bank devalued the yuan by the most in two decades, a move that may help shore up margins at Pegatron and Hon Hai, which assembles the iPhone and other Apple devices and gets half its sales from the US company.

"Assuming that revenue doesn't change and suppliers don't have to pass the benefits on to Apple, the yuan cut should boost margins for the suppliers," said Alberto Moel, a Hong Kong- based analyst at Sanford C. Bernstein.

The suppliers' gross margins, which measure the ratio of sales left after production costs, could climb as much 0.5 percentage points after dollar-denominated sales are converted into yuan to pay off local workers and other costs, Moel said.

The full magnitude of the yuan's depreciation would not get passed on to Apple because many of the two suppliers' costs are still denominated in the US currency, he added.

Hon Hai depended on Apple for half of its US$139 billion in revenue last year. The US company last month reported iPhone shipments that missed expectations, and forecast sales for the current period that also fell short of estimates.

Hon Hai, the largest member of Terry Gou's Foxconn Technology Group, employs over a million workers in China during its peak season to assemble iPhones, iPads as well as game consoles, personal computers and televisions.

"A yuan cut is going to soften the impact of Apple's weak outlook because if there's no room to boost top line, then at least the currency change can help their bottom line," Mr Moel said.

Both Hon Hai and Pegatron declined to comment on the impact of Tuesday's yuan devaluation.

The yuan's devaluation underscores policy makers' efforts to supports the country's exporters and combat the deepest economic slowdown since 1990, economists say.

China is Apple's largest market after the US, a region the iPhone maker is counting on to sustain its growth. The Greater China area, including Hong Kong and Taiwan, accounted for US$13.2 billion or 27 per cent of the company's June-quarter revenue.

Although sales of the iPhone rose 87 per cent in China in that period, disappointing global smartphone shipments and expectations for slower Chinese growth have helped drive Apple shares 4.4 per cent lower since its quarterly report in July.

BLOOMBERG