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Apple supplier Hon Hai posts record profit, but challenges lie ahead

A worker passes under nets installed to prevent suicides at a Foxconn factory in Langfang, Hebei province, in a file photo. Taiwan’s Hon Hai Precision Industry Co. Ltd., also known as Foxconn Technology Group, is bracing for a weaker performance from its biggest client, iPad maker Apple Inc.


Taiwan's Hon Hai Precision Industry Co. Ltd. posted a record net profit and lifted margins in the last quarter as it braced for a weaker performance from its biggest client, iPad maker Apple Inc.

Hon Hai draws an estimated 60 to 70 per cent of its revenue assembling iPhones and iPads and other work for the California-based company.

But Apple's revenue has begun to lag market expectations while analysts say Hon Hai is in a less advantageous position to profit on key Apple products on the horizon.

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"Hon Hai will have less bargaining power for the upcoming new models and that will weigh on its gross margin," said Yuanta Securities analyst Vincent Chen.

Both the iPhone 5S, expected to be released in the third quarter, and a cheaper version for emerging markets are unlikely to face the production bottlenecks that Hon Hai encountered with the iPhone 5 last quarter, Mr. Chen said.

Those bottlenecks, he added, helped Hon Hai to secure better profit margins in its supply arrangements with Apple.

Apple's share price tumbled in January when it announced quarterly revenue and forecasts below Wall Street expectations, after iPhone sales in the holiday period disappointed.

Hon Hai, whose other businesses include retail and solar cells, said on Monday net profit in October-December was T$37-billion ($1.24-billion U.S.), versus a median forecast of T$36.2-billion from 13 analysts polled by Thomson Reuters I/B/E/S.

Earnings compared with T$35.03-billion in the same period a year earlier and T$30.3-billion in the third quarter.

Gross margin climbed to 9.6 per cent, according to analysts calculation, compared with 9.5 per cent in the previous quarter and 8.9 per cent a year earlier.

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Some analysts believe Hon Hai's margins will stabilize or pick up again from the second quarter, benefiting from a possible increase in component opportunities with Apple, which is expected to put more of its orders with major suppliers.

Hon Hai is also moving to cut production costs in China, while grabbing a bigger market share in large-screen TVs and reducing operating losses at its handset manufacturing subsidiary, Foxconn International Holdings Ltd.

"We expect the supply chain to consolidate further, benefiting volume players such as Hon Hai through more component orders," said JPMorgan Chase & Co. analyst Gokul Hariharan in a research report.

He said new component opportunities with Apple, primarily casings, touch panels, adaptors and camera modules, were expected to add 25 to 35 per cent in profit per box for Hon Hai.

But given the company's heavy dependence on Apple, its revenue growth is likely to remain subdued until new categories of products emerge from the U.S. device maker, he added.

Hon Hai has been moving its China factories inland in search of lower labour costs as wages surge in coastal cities. The company also said it froze hiring at Shenzhen, its largest plant in the country, in February.

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Foxconn International Holdings, the world's biggest contract maker of cellphones, fell into the red in 2012 with a net loss of $316.4-million due to weak orders from some of its major customers.

Shares of Hon Hai inched down 0.6 per cent on Monday before the results announcement, versus a 0.8 per cent rise in the broader market.

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