The global smartphone market has seen better days, yet the industry underpins the hottest stocks in Asia's best-performing sector this year.
The MSCI Asia Pacific Infotech index is up almost 16 percent in 2017, outgunning the runner up (industrials) by just shy of 7 percentage points.
And leading that sub-index, in dollar terms, are smartphone suppliers. What's interesting is that these outperformers are neither brand names nor assemblers, but makers of the specialized components that go into each device.
Sunny Optical Technology Group Co. and LG Innotek Co. are up more than 68 percent apiece. I wrote about Sunny two weeks ago, and it's added another 7 percent since then. What that Chinese company and South Korea's LG Innotek have in common are their supplies of dual-lens cameras for smartphones. Innotek, part of the LG chaebol, is expected to supply such parts to Apple Inc.'s iPhone 8, according to analysts.
Joining the Korean charge, two Samsung group members -- Samsung Electro-Mechanics Co. and Samsung SDI Co. -- are also at the top of the class. Both took a hit in 2016 because of the Note 7 battery crisis and now are back in investors' good books. The former not only makes camera and communications modules, but supplies capacitors -- which can number more than 700 per smartphone. SDI is a battery maker, and despite last year's debacle remains a crucial part of the supply chain.
Then there's AAC Technologies Holdings Inc. and Catcher Technology Co. If you had to pick one standout winner from the smartphone era it would be China's AAC, among the premier makers of speakers and microphones used in electronics devices. The stock is up more than 12-fold in the past decade and hit a new high in Hong Kong last week.
Catcher is a similar beneficiary of the smartphone era -- not due to the increased demand for electronic components, but because Apple and its contemporaries opted years ago to switch from plastic casings for their devices to metal, of which Catcher is a key supplier.
Even though the smartphone market is facing a slowdown, I've noted before that there remains strength in the top end, where consumers are still willing to pay more for premium specs. That's why suppliers of the most advanced parts can still win.
There's another reason why they may be finding favor. A lot of crossover exists between smartphones and what some investors predict will be the next big thing: driverless cars.
Whether it's a road-ready Tesla or a Google concept car, vehicles need increasing amounts of sensors, cameras and other electronic components to replace humans and their neck-top computers.
One fund manager long on the sector, Elizabeth Soon of PineBridge Investments Asia Ltd., told Bloomberg's Eric Lam and Narae Kim that patience is needed to play on these companies, because it could take a while for the industry to develop.
As they wait, investors can still play on their smartphones.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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