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Apple's upcoming iPhone enables Foxconn's gravity-defying act
[BEIJING] Growing optimism about the next iPhone has propelled Apple Inc to record highs. Halfway around the globe, a lesser-known Taiwanese company is riding that same wave of euphoria.
Hon Hai Precision Industry Co, the main assembler of the US company's smartphones, has gained 29 per cent in the past year, with its shares touching a decade-high on optimism about Apple's 10th anniversary iPhone.
That's helped the biggest company in Foxconn Technology Group defy a flat-lining mobile market on expectations Apple will use the anniversary to introduce its most advanced and popular device yet. Then there's Terry Gou, who's re-tooling Foxconn for the future. The billionaire founder's installed robots throughout a juggernaut that spans China to South-east Asia to shore up its manufacturing prowess, while investing in emergent fields from virtual reality to artificial intelligence. He spearheaded the acquisition of Sharp Corp, transforming the ailing Japanese giant into a company that's tripled in value and is now jointly investing billions. Underscoring the revival underway, Sharp on Friday raised its annual operating profit forecast by 27 per cent.
"In the long run, Hon Hai will become a multi-faceted conglomerate as the company's obviously making bets in emerging sectors like robotics and Internet of Things," said Annabelle Hsu, an analyst with IDC in Taipei. "The main areas where Hon Hai is cooperating with Apple are seeing slower growth - think smartphones and tablets. Hon Hai has to find emerging sectors where growth rate is high. They are good at this."
Foxconn's approach isn't encroaching on its best client's turf so far as it gets away from being an assembly business that relies on cost-efficiency. While Sharp is barely relevant in smartphones, it has valuable display technology that Apple uses, plus an enduring name in consumer electronics that may propel Mr Gou's ambitions of moving up the value chain.
Hon Hai, as part of a Foxconn consortium, bought control of Sharp last year and the Japanese company is showing signs of life after years of getting pummeled by Korean rivals. The pair are jointly building a 61 billion yuan (S$12.6 billion) liquid-crystal-display factory in the southern Chinese city of Guangzhou that by 2019 will crank out next-generation displays for TVs. The Japanese company has set aside 200 billion yen (S$2.5 billion) for developing organic light-emitting diode display facilities, staking a claim on a technology Apple's expected to adopt in future iPhones.
Foxconn and Hon Hai's diversification effort, coupled with iPhone exuberance, has helped its share price remain resilient in the face of bad news, closing at NT$90 on Friday. Last month, the company recorded its first annual revenue decline in history. With the next iPhone not expected until the second half of the year, analysts are projecting that Hon Hai will soon report its first annual net income drop since 2008, a year after the iPhone debuted.
Apple, which accounts for half the company's revenue, played a pivotal role in the stock's recent buoyancy. The US company this month reported stronger-than-expected iPhone sales during the key holiday quarter. While the iPhone 7, introduced in September, failed to convince as many existing customers to upgrade as its predecessor, it did attract new smartphone buyers. That bodes well for the iPhone slated for later this year.
This month, analysts at Citigroup Inc, Nomura Holdings Inc and HSBC Holdings Plc upgraded Hon Hai to a buy rating. William Yang, an analyst with Citi, wrote in his report that its valuation hasn't quite reflected the full impact of the new iPhone, particularly if it becomes the sole assembler for an OLED-equipped device.
"Though a strong iPhone 8 launch may seem obvious, we don't believe that the market has fully priced in the prospects of a significant pick-up in iPhone shipments this year," Mr Yang wrote. "After its good progress on investment in Sharp, Hon Hai can also offer more components such as finger-print sensors and camera modules for both iPhones and iPad."
In the short run, Hon Hai's still grappling with the slowdown in its key markets: mobile and PC. Revenue is projected to slip about 3 per cent in 2016, and net income 13 per cent. But earnings growth could rebound to 12.2 per cent this year, the average of analysts' estimates compiled by Bloomberg.
Apple could sell 20 million to 23 million iPhones during the December quarter in China alone, Counterpoint Research estimates. That's about 20 per cent higher than the roughly 17 million it managed when Apple debuted the iPhone 6S and iPhone 7 in previous years, a major boost for the company in its single largest market outside of the US.
"We are expecting a completely new iPhone with new designs and technologies used," said James Yan, a research director for the consultancy in Beijing. "That will greatly increase sales."