Why stock traders are dumping Apple supplier Foxconn Industrial

The stock – despite a 33pc drop – is trading at 19 times earnings, ahead of the 16 times for Apple, the world’s most valuable company

PUBLISHED : Sunday, 08 July, 2018, 10:00am
UPDATED : Sunday, 08 July, 2018, 10:00am

Foxconn Industrial Internet is quickly losing favour among investors only a month after its stellar debut on China’s stock market.

The affiliate of Hon Hai Precision Industry, known for assembling iPhones and iPads, is now among the worst-performing initial public offerings in the mainland this year, with its shares down 33 per cent from its peak in June. Its descent was swift, even as analysts had touted the company a unicorn of China’s manufacturing industry, and the regulators fast-tracked the approval process for the flotation.

These privileges were not enough to convince investors like Hengsheng Asset Management, which said the stock was more overvalued than its main customer Apple, or Midea Group, a comparable industry giant that is also making its foray into smart manufacturing. Foxconn Industrial’s ambition to turn itself into a smart manufacturer that offers businesses from cloud computing service to precision gadgets and industry robots also had a long way to go, they said.

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“We simply view the company as a traditional assembler that has low profit margins and its plan to develop smart manufacturing is still in the storytelling stage,” said Dai Ming, a Hengsheng Asset fund manager in Shanghai. “And the size of the company is already pretty big, and it’s impossible for the market to give it a valuation premium like smaller growth companies.”

Foxconn Industrial is now valued at 339.4 billion yuan (US$51.1 billion) after raising 27.1 billion yuan in the mainland’s biggest IPO sale in three years. Its market capitalisation is 50 times as big as the average size of the 729 companies on the ChiNext board for growth stocks. Its shares added 1.6 per cent to 17.23 yuan at the close in Shanghai on Friday.

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Expectations had been high for its post-IPO stock performance as Chinese regulators unveiled a slew of favourable policies to woo home listings of fast-growing technology companies. Foxconn Industrial waited only 27 days before its IPO application was vetted by regulators, against the 500-plus days for regular IPO candidates.

Even after a 33 per cent drop from its all-time high, the company is still valued at 19.2 times estimated earnings for this year, making it pricier than Apple that has a multiple of 16.1 times, according to Bloomberg data. The stock is also 32 per cent more expensive than Midea, China’s biggest appliance maker that has already made a concrete step in entering smart manufacturing by acquiring a major stake in Kuka, the world’s larger producer of robots used to make cars.

We simply view the company as a traditional assembler that has low profit margins and its plan to develop smart manufacturing is still in the storytelling stage
Dai Ming, Hengsheng Asset Management

A breakdown on Foxconn Industrial’s current sources of revenues does not seem to justify its valuation premium. Manufacturing of phone equipment made up 61 per cent of its sales in 2017, while the proportion of industry robots was less than 0.4 per cent.

“The market has doubt over how much real hi-tech the company has on hand,” said Wu Kan, a fund manager at Shanshan Finance in Shanghai. “And its smart manufacturing plan is still the wild card.”

Sell-side analysts have been slow in adjusting their rating on the stock and the share-price estimates. All the six brokerages including China International Capital Corp and Ping An Securities that cover the stock, according to Bloomberg, rate the stock a “buy”, setting an average 12-month price target of 22.16 yuan.

Hengsheng Asset’s Dai said Foxconn Industrial would be more reasonably priced at below 15 yuan, which indicates a minimal 13 per cent drop from Friday’s close.

“The market is always right,” said Shanshan Finance’s Wu. “There’s probably more room for downside on the stock.”