Apple Inc. (NSDAQ:AAPL) supplier, Foxconn International Holdings Limited (HKG:2038) reported 2H12 net loss of $90M. While the net loss was much smaller compared to that of -$226M in 1H12, it was much worse than estimates of -$49M. Why were earnings for the company so much worse than expected? was it related to Apple Inc. (NASDAQ:AAPL)?
In a new report today, analysts from Citigroup state that the weaker than expected earnings was due mainly to the very high production ramp up cost for the iPhone 5 metal casing / module assembly and the subsequent iPhone 5 project delay due to weak end demand.
Citi believes ‘that given that iPhone 5 demand continues to be weak’, they do not expect FIH to get any overflow orders from Hon Hai in 1H13. As such, they expect 1H13 earnings to continue to stay weak. More details from Citi below:
Turnaround depends on low-end iPhone
Citi expects Apple Inc. (NSDAQ:AAPL) to launch a plastic casing low-end iPhone in July with 2H13 build plan to be more than 60M units, based on supply chain build plan estimates. Given Foxconn’s ample plastic casing capacity, they expect Hon Hai Precision Industry Co., Ltd. (TPE:2317) would continue to subcontract plastic casing / module assembly business to FIH for the low-end iPhone.
However, given the potentially high retail price of a low-end iPhone (Citi estimates it to be US$450), whether Apple Inc. (NSDAQ:AAPL) can sell that many units in 2H13 and the potential earnings contribution to Foxconn remains highly uncertain.
Plenty of business opportunity, key is timing and execution
Given Internet companies’ rising interest in the smartphone business, Citi is seeing a big increase of outsourcing opportunities for FIH. With the strong sell-through of its M2, they expect Xiaomi to become an important customer for FIH in 2013.
Despite the delay of the Amazon smartphone from mid-2013 to late 2013 / early 2014 due to change to its chipset platform, Citi expects Amazon would become a substantial revenue / earnings contributor once mass production is entered. They also believe Facebook’s smartphone to potentially be moved from HTC to FIH. Given HTC’s higher margin requirement, they believe it would be hard for Facebook Inc (NASDAQ:FB) to lower the price of its smartphone. By working with FIH, Citi expects Facebook could ‘easily lower the retail price by 20%’.
Citi is not concerned about the business opportunities for FIH. The problem remains on whether FIH can launch these models on time and generate reasonable margin on those big projects. Given that the stock is already trading at around 2012E P/B of 0.8x and given that Citi believes that there are see plenty of growth opportunities in the next 12 months, and still consider the risk reward profile of FIH to be relatively attractive.