Top Apple supplier Foxconn makes case for branching out

[HONG KONG] Foxconn's latest results reinforce the case for management to hedge its dependence on Apple. While a one-off gain flattered fourth-quarter figures, margins slid as the US$53 billion Taiwanese group grappled with rising expenses and the late release of the latest iPhone model. No wonder boss Terry Gou is keen to reduce his company's reliance on orders from California.

The world's largest contract electronics manufacturer announced late on Friday that 2017 earnings hit NT$139 billion, or about S$6.3 billion. That implied forecast-beating earnings of nearly NT$72 billion for the fourth quarter - typically the most important part of the year. Yet, the underlying trends look gloomy. In late December Foxconn sold about NT$66 billion of shares in Japanese subsidiary Sharp to its own executives and staff, which yielded a big boost to reported earnings in the absence of a more fundamental uptick.

Meanwhile gross margins undershot badly at 6.1 per cent, or 1.3 percentage points below consensus estimates collected by Thomson Reuters. Fubon analysts, who reckon iPhones will make up 39 per cent of all Foxconn sales this year, blamed the iPhone X's late launch in November, which left Foxconn plants underutilised.

If iPhone Xs fly off the shelves this year, performance will no doubt improve. Even so, as an assembler, Foxconn captures a relatively small share of the economic value created - as reflected in a market capitalisation that is about 6 per cent of Apple's - and is uncomfortably reliant on a single client.

Hence Mr Gou is understandably keen to diversify. He wants to offer more branded goods; thus deals like Foxconn's pounce on Sharp in 2016 and last week's US$866 million purchase of Belkin, which makes electronics accessories. He is investing in research-intensive areas like cloud computing and super-fast wireless that might deliver higher margins. To help fund it, he's lined up a blockbuster mainland listing of a US$50 billion-plus subsidiary, a move that might also secure a higher valuation for the parent company.

Reinvention is expensive. Quarterly earnings before interest and tax of NT$32 billion were less than half analysts' forecasts; management said a marketing blitz and heightened research spending pushed up operating expenses, according to Nomura. Potential future risks include overpaying for assets or mismanaging acquisitions. But like many consumers, Foxconn would do well to cut down on its smartphone time.

Foxconn, the world's largest contract electronics manufacturer, said on March 30 that earnings for 2017 totalled NT$139 billion, on operating revenue of NT$4.7 trillion. For the fourth quarter, earnings rose 4.2 per cent year-on-year to NT$71.7 billion, according to a Reuters calculation.

On March 27, Hong Kong-listed subsidiary Foxconn Interconnect Technology said it had agreed to pay US$866 million for Belkin International, a US maker of wireless chargers, smartphone cases and other electronics accessories. Belkin founder and majority owner Chet Pipkin will become chief executive of a new subsidiary of the buyer, which is also known as FIT Hon Teng.

On March 8, subsidiary Foxconn Industrial Internet won approval for an initial public offering in Shanghai, just weeks after filing its application.

Shares in Foxconn, known formally as Hon Hai Precision Industry Co, stood at NT$89.10 by mid-morning in Taipei on April 2. The stock has fallen about 6.4 per cent so far this year, Eikon data shows.

REUTERS