Foxconn group to see iPhone 8 windfall in the second half of 2017

Hon Hai expected to see an upsurge in operating margins for fiscal 2017, say analysts

PUBLISHED : Sunday, 12 February, 2017, 8:34pm
UPDATED : Monday, 13 February, 2017, 7:43am

The huge potential of the much-speculated, tenth-anniversary iPhone has analysts predicting a windfall for Taiwan’s Hon Hai Precision Industry, the world’s largest contract electronics manufacturer known widely as Foxconn Technology Group.

Apple is expected to launch the “iPhone 8” in the second half of this year, with the top-of-the-line model assembled by Hon Hai to feature an advanced organic light-emitting diode (OLED) display.

Citi Research analysts William Yang and Winnie Tao said on Friday that Hon Hai is poised to significantly revive its operating margin, a key measure of profitability, after they upgraded the company’s shares to “buy” on February 6.

Hon Hai’s operating margin is forecast to reach 3.8 per cent for its upcoming fiscal 2017 that ends in March next year, up from an estimated 3.6 per cent for its fiscal 2016 that ends in March this year, according to the earlier Citi report.

The Citi analysts estimated that a single percentage point expansion in operating margin would mean NT$43.9 billion (HK$10.96 billion) in profit for Hon Hai.

“We believe our assumption of a 3.9 per cent operating margin in fiscal 2018, against 3.6 per cent in fiscal 2016, is achievable – driven by greater scale, thanks to the OLED iPhone, and a more favourable pricing trend, thanks to Hon Hai’s better product efficiency,” Yang said. “In addition, the OLED iPhone is the first new iPhone to have many new features since 2014.”

Apple released its iPhone 6 and 6 Plus in September 2014, which delivered widescreen high-definition displays, faster microprocessors and the iOS 8 operating system.

Speculation is rife that the iPhone 8, which Citi predicted will record shipments of 110 million units in the second half of this year, will also provide wireless charging, a second high-resolution front camera and enhanced waterproof features.

“We believe Apple should have a reasonable expectation to achieve higher earnings on this product and thus, have more profit to share,” Yang said.

Citi has reported that Hon Hai will be Apple’s sole supplier for the iPhone 8 model with a 5-inch display, which is the only version built with an OLED screen. Rumours have swirled that this version could sell for more than US$1,000 each at retail.

Pegatron Corp will build the iPhone with a 4.7-inch display, while Hon Hai and Wistron Corp will share production for the version with a 5.5-inch display.

Apple is forecast to account for around 46 per cent of Hon Hai’s total sales in the 12 months to March and 48 per cent in its fiscal 2017, according to Citi.

“We sense Hon Hai remains the best choice as Apple has no other assembler it can work with on this most important project (OLED iPhone),” Yang said. “Hon Hai has supplied iPhone since day one with higher scale, better yields and a more comprehensive components offering than its peers.”

Founded by entrepreneur Terry Gou Tai-ming in 1974, Hon Hai operates a vast network of factories in mainland China and related businesses in other locations around the world.

Counterpoint Technology research director Neil Shah told the South China Morning Post that the upcoming iPhone refresh “should surpass the iPhone 6 series volume shipments by at least 25 per cent”.

“The iPhone is now entering a two-year super cycle, which will see a greater base of 5s, 6 and 6s Plus users upgrading to the new models,” Shah said.

Other factors benefiting the iPhone 8 is the expanded reach of Apple’s services like Apple Pay and Apple Music, more Apple retail stores around the world, and new manufacturing and distribution in India, the world’s second-largest smartphone market, he added.