Investors looking to play the launch of the highly anticipated iPhone 5 without buying Apple shares – which almost touched $670 overnight – should look to its supply chain in Asia, in particular the company’s contract manufacturer Hon Hai Precision Industries, says Barclays.
Shares in Taiwan’s Hon Hai - the exclusive assembler of the iPhone 5 - have already gained 12 percent year-to-date and are expected to rise another 22 percent in the next 12 months, says Kirk Yang, Head of Asia Technology Research, at Barclays.
“We look for monthly sales, but more importantly operating margins, to improve in the third quarter and with a much larger bounce in the fourth quarter,” Yang, who is overweight on the stock, said in a note Thursday.
The outlook for the rest of year is bright for Taipei-listed Hon Hai - the flagship unit of the Foxconn Technology Group - as it will begin to include the sales of the new phone in its results from September onwards.
All iPhones are expected to account for 25 percent of Hon Hai’s sales in 2012, and up to 35 percent of its profits in the second-half, according to Barclays’ calculations.
The iPhone 5 launched on Wednesday in San Francisco will be available for pre-orders from September 14, but will go on sale in 9 countries a week later.
Yang expects shipments of the iPhone 5 to surpass estimates. “We believe our current forecast of 41 million units for the fourth quarter of the current year might be too conservative,” he said.
Large sales volumes are critical for members of Apple’s supply chain, who operate on low margins.
“For a lot of these manufactures and suppliers – their margins are extremely thin – the minute iPhone sales skyrocket you need to buy them (their shares) because it’s going to translate into very good numbers,” said Kelvin Tay, Chief Investment officer at UBS Wealth Management, who adds that the new iPhone is being considered as an replacement for Research in Motion’s Blackberry among many corporates.
“If that goes through, you can imagine how much more sales there will be,” Tay said.
Apple’s latest offering will hit the shelves in 100 countries by the year-end – a faster pace than in previous years, suggesting that earlier concerns over a shortage of components were overblown.
In addition to benefiting from the iPhone 5, Yang says the company is managing its costs better than some other contract manufacture in Asia and has a list of solid customers.
While Apple is Hon Hai's biggest customer, it also manufactures parts for Cisco , Dell , Nokia , and Sony .
In an effort to contain costs amid rising wages in southern China's factory belt, Hon Hai has been relocating its factories inland to cities including Chengdu in Sichuan province and Wuhan in Hubei province.
The company is also heavily investing to improve automation levels, with a target of building 1 million robots in the next two years, up from about 10,000 robots in 2011.