Company Reports

Hon Hai’s second-quarter 2024 result was stronger than expected and the outlook was better than expected, driven by strong artificial intelligence-related demand for Foxconn Industrial Internet, or FII, servers that are used by corporates and in data centers. AI server revenue grew nearly 300% year on year in the second quarter after increasing nearly 200% year on year in the first quarter. Second-quarter consolidated revenue and gross profit increased by 19%, with operating profit increasing by 44%, all on a year-on-year basis. July revenue was also up 22% year on year, so the momentum has been retained. For 2024, management is still guiding for flat revenue from consumer electronics products and computing products, which contributed 72% of Hon Hai’s revenue in 2023—but strong growth from cloud and networking products, and components and other products, which contributed the remaining 28% of 2023 revenue. Overall, management maintains its outlook for significant growth for the full year and believes visibility has become even better than in the previous update in May.

Apple, which has established itself as a consumer electronics behemoth over the past decade, has propelled Hon Hai into the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for around 55% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital have fallen to 11% in 2023 from 23% in 2016.

Apple, which has established itself as a consumer electronics behemoth over the past decade, has propelled Hon Hai into the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for around 55% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital have fallen to 12% in 2022 from 23% in 2016.

Hon Hai’s first-quarter 2024 result was broadly in line with our expectations. Still, the outlook was better than expected, driven by strong artificial intelligence-related demand for Foxconn Industrial Internet servers used by corporates and in data centers. First-quarter revenue declined by 9.5%, with gross profit declining by 5.3% and operating profit decreasing by 9.3%, all on a year-on-year basis. However, we note that April revenue was up 19% year on year on the back of March revenue increasing 11.8% year on year, so recent momentum is strong. For 2024, management is guiding for flat revenue from consumer electronics and computing products, which contributed 72% of Hon Hai’s revenue in 2023. It is guiding for strong growth from cloud and networking products and components and other products, which contributed the remaining 28% of 2023 revenue. Management indicated in this result that “in terms of visibility for 2024, we are seeing better performance than we expected in March.” This is mainly due to strong AI server demand, with AI server revenue increasing at nearly 200% year on year in the first quarter, and it expects this growth to improve quarter over quarter. We estimate that AI servers currently contribute about 5% of Hon Hai’s revenue.

No-moat Hon Hai’s 2023 result was weak on revenue, down 6% year on year, but improved product mix and a focus on inventory and cost control allowed operating income to decline only 4% year on year. Strong nonoperating income growth allowed net profit to be broadly flat. Hon Hai’s stock price has risen around 19% over the two weeks leading into the result, which seems to be related to bullish sentiment toward artificial intelligence, or AI-driven demand for Foxconn Industrial Internet's, or FII’s servers that are used by corporates and in data centers. While Hon Hai saw “significant growth” in revenue in February from this source, consolidated Hon Hai revenue in February was down 12.3% year on year, with cumulative revenue growth for the first two months down 17.7% year on year. Growth in the cloud and computing products segment has, so far this year, been more than offset by declines from the smart consumer electronics segment—mainly Apple smartphones—and the computing products segment, due to lukewarm PC market demand. Nevertheless, we upgrade our fair value estimate for Hon Hai to TWD 122 per share from TWD 104, due to upgraded forecasts from the inclusion of more aggressive assumptions for growth from the AI servers business, particularly in the outer years of our forecasts. We see Hon Hai’s shares as currently fairly valued.

Apple, which has established itself as a consumer electronics behemoth over the past decade, has propelled Hon Hai into the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for around 55% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital have fallen to 12% in 2022 from 23% in 2016.

We reinitiate coverage of Hon Hai with a no-moat rating and fair value estimate of TWD 104. We see the shares as fairly valued at this time. Hon Hai is the largest contract manufacturer of consumer electronics, communications, and computer products in the world and despite elements of scale-based cost advantage and switching costs, we believe its offerings are sufficiently commoditized to give it no moat. The company is synonymous with the Apple brand, with Apple generating just over half of Hon Hai’s revenue. Hon Hai has been challenged by fierce competition and a maturing smartphone end market, which has seen the group’s return on invested capital fall to 12% in 2022 from around 20% from 2003-07 as gross margins fell to around 6% from the low double digits over the same period. With the stagnation of the smartphone market since peak global smartphone sales in 2016, Hon Hai is looking to electric vehicle manufacturing to drive growth and lift margins. Management is targeting a gross margin of 10% by 2025 and we believe the shares would see substantial upside if it can get close to this target, given our estimate of the company only reaching 6.6% by this time, which is broadly in line with PitchBook consensus.

Apple, which has established itself as a consumer electronics behemoth over the past decade, has propelled Hon Hai into the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for around 55% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital have fallen to 12% in 2022 from 23% in 2016.

Apple, which has established itself as a consumer electronics behemoth over the past decade, has propelled Hon Hai into the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for 50% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital have fallen to 12.9% in 2020 from 17.3% in 2009.

We are placing Hon Hai Precision under review following a change in analyst coverage. We plan to reinitiate the coverage of Hon Hai Precision by the end of 2022.

We have raised our Hon Hai fair value estimate to TWD 111 per share from TWD 109 after accounting for first-half 2021 results. This valuation implies a multiple of 10.9 times 2021 earnings.

Apple, which has established itself as a consumer electronics behemoth over the past decade, has propelled Hon Hai into the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for 50% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital have fallen to 12.9% in 2020 from 17.3% in 2009.

We are raising Hon Hai's fair value estimate to TWD 109 from TWD 95 previously, largely from adjusting slightly better margin assumptions in fiscal 2021 onward, due to further vertical integrations among its subsidiaries in the component space. This is despite the fourth quarter’s gross margin tracking lower than our expectation, largely due to product mix changes and foreign exchange impact. Our fair value estimate of TWD 109 implies a multiple of 10.7 times 2021 earnings versus Pitchbook consensus of 14.8 times 2021 price/earnings.

Apple, which has established itself as a consumer electronic behemoth over the past decade, has propelled Hon Hai to become the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for 50% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital, or ROIC, has fallen sharply to 12.9% in 2020 from 17.3% in 2009.

We have raised our Hon Hai fair value estimate to TWD 95 from TWD 90 previously, largely to reflect higher gross margin assumptions in fiscal 2020 and 2021. Third quarter’s gross margin expansion tracked higher than our full-year estimates, largely due to production yield enhancement and higher than anticipated COVID-19-related expense rebates from customers and government. Hence, we lift our fiscal 2020 gross margin estimate to 6.0% from 5.8% previously. Meanwhile, management’s 2021 revenue guidance for consumer was slightly ahead of our expectations, which suggests a stronger iPhone cycle that is aided by spillover demand into first half of 2021 due to iPhone 12 launch delay. Therefore, we increase our 2021 consumer revenue and gross margin assumptions. As a result, we raise both 2020 and 2021 operating income by 4% to TWD 114 and 140 billion, respectively. Our fair value estimate of TWD 95 implies a multiple of 9.3 times 2021 earnings, which is in line with its five-year average. We consider shares fairly valued. Although we have adjusted our 2020 and 2021 gross margin higher than previously, we still maintain a conservative stance on Hon Hai’s gross margin (versus CapIQ’s consensus) due to risks of stiffer competition as a result of Luxshare’s iPhone entry in 2021. Further, we don’t think that Hon Hai’s shift to new areas such as electric vehicles, robotics, and medical will be fast enough to offset potential headwinds in its legacy iPhone business.

Apple, which has established itself as a consumer electronic behemoth over the past decade, has propelled Hon Hai to become the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for 50% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital, or ROIC, has fallen sharply to 11.7% in 2018 from 17.3% in 2009.

Apple, which has established itself as a consumer electronic behemoth over the past decade, has propelled Hon Hai to become the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for 50% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital, or ROIC, has fallen sharply to 11.7% in 2018 from 17.3% in 2009.

Hon Hai’s second-quarter results beat our expectations, largely due to better than expected computing and server profitability. Although second-quarter sales declined 2.7% year on year, enterprise and computing sales grew 10.1% and 16.7%, respectively, driven by solid work-from-home and remote learning demand, which will persist through third quarter, according to management. Meanwhile, operating income jumped by 44.5%, as gross margin expanded to 5.9% from 5.3% in the same period last year. In our view, the firm’s impressive margin expansion was primarily due to: 1) strong profitability recovery at Foxconn Industrial Internet, or FII, which saw its second-quarter gross margin increase by 200 basis points to 7.6% from the previous year, driven by margin enhancement due to solid network server sales; 2) computing margin improvement; and 3) contribution from coronavirus-related subsidies from customer and local government. While we recognize that the last factor is more of a one-time contribution, management mentioned that overall gross margin increased relative to June quarter last year even excluding subsidies.

Apple, which has established itself as a consumer electronic behemoth over the past decade, has propelled Hon Hai to become the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for 50% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital, or ROIC, has fallen sharply to 11.7% in 2018 from 17.3% in 2009.

On July 17, Luxshare announced plans to acquire, together with its parent company and a potential third party, two of Wistron’s subsidiaries, Wistron Investment (Jiangsu), or WJC, and Wistron Infocomm Manufacturing (Kunshan), or WEKS, for approximately CNY 3.3 billion, which will be funded entirely by cash. Luxshare plans to fork out less than CNY 600 million (18% stake) and will not be consolidating the asset post-deal, hence we think this acquisition will have limited direct earnings impact for the firm. The deal is pending regulatory approval and is expected to be completed by the end of the year. We believe that WEKS is Wistron’s China iPhone assembly facility, although it hasn’t been specified by the company. Luxshare has been widely expected to enter into the iPhone assembly supply chain, as Digitimes had previously reported that Luxshare was in talks with both Catcher and Wistron to acquire some of their assets.