Hon Hai Profit Disappoints as Sales Sag Ahead of New iPhone

  • Apple’s main supplier is grappling with a flattening market
  • Fast-growing Chinese brands aren’t clients of Hon Hai’s

Hon Hai Precision Industry Co. reported earnings that missed analysts’ lowest estimates as growth in worldwide smartphone shipments plateaued ahead of Apple Inc.’s 10th anniversary iPhone model this fall.

The world’s biggest contract manufacturer of electronics reported net income of NT$17.88 billion ($589 million) in the three months ended June, the Taipei-based company said. That compares with the NT$23.7 billion average of analysts’ estimates compiled by Bloomberg.

Worldwide smartphone shipments grew just 3 percent in the second quarter, according to research firm Counterpoint. Much of that growth came from Chinese vendors such as Oppo and Huawei Technologies Co., which operate their own assembly plants instead of outsourcing to Hon Hai or other parts of Foxconn Technology Group. And while the next iPhone is scheduled to be released in the fall, possible delays in mass production of the more complex model could curtail Foxconn’s third-quarter results, Gokul Hariharan, an analyst at JPMorgan Chase & Co., wrote ahead of the earnings.

In the short run, Hon Hai is responding to a slowdown in its key markets by keeping a lid on costs and boosting the efficiency of its production machine. Founder Terry Gou is installing robots to automate and offset rising labor costs in China, its main global base of production. The market may have over-estimated Hon Hai’s ability to shave costs by deploying new technologies, said Vincent Chen, an analyst at Yuanta Securities. “Looks like they were a little bit too optimistic about that,” he said.

Gou’s main listed vehicle assembles devices from Sony Corp.’s PlayStation to Hewlett-Packard computers but relies on Apple for half its sales. The U.S. company’s 10th anniversary model comes with an organic light-emitting diode screen covering almost the entire front and face scanners that could replace Touch ID fingerprint unlocking, Bloomberg News reported in July. Limited supply of OLED however could hamper production.

“The Street has already baked in the OLED iPhone delay and share price momentum would be dictated by the sell-through demand for OLED iPhone in the fourth quarter of 2017," Hariharan wrote.

Hon Hai had previously reported 0.7 percent higher revenue of NT$1.89 trillion in the quarter. Shares of the company closed mostly unchanged in Taipei.

Over the long run, the company is also investing in emergent fields from virtual reality to artificial intelligence, and expand its manufacturing footprint beyond China. Foxconn is building a $10 billion liquid-crystal display factory in Wisconsin that may hire as many as 13,000 people. U.S. President Donald Trump has said the Taiwanese company’s investments in the country could reach $30 billion.

Foxconn has yet to disclose other U.S. investment decisions but says it’s considering projects in various locations including Michigan, another swing-state during Trump’s presidential campaign last year.

On the consumer electronics front, Gou is slowly bringing Sharp Corp. back to life after taking over the money-losing Japanese company last year. Sharp reported a third straight quarter of profit, adding to evidence that its new owner is putting the company on track to end a three-year streak of losses.

— With assistance by Yuan Gao

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