The iPhone Impact: Apple Supplier Hon Hai Posts Record Profit

The Taiwanese manufacturer earns as much as 60 percent of revenue primarily assembling Apple products such as its iPhone 5s (Pictures), analysts estimate, and in recent months has diversified into software and services as industry watchers point to a slowdown in the smartphone market.

(Also see: Foxconn sees net profit grow in 2013 on iPhone demand)

But Apple defied such forecasts in March when iPhone shipments beat market estimates by 15 percent, pushing first-quarter revenue to a record high in a post-holiday period when consumer goods sales typically fall.

That demand helped Hon Hai book a 19.5 percent rise in first-quarter net profit to T$19.54 billion ($647.6 million), versus the T$18.18 billion mean estimate of 12 analysts polled by Thomson Reuters.

Shares of Hon Hai ended 0.3 percent higher ahead of the result, compared with a 0.7 percent gain in the broader TAIEX index. The stock has risen 9.7 percent since the start of the year versus the benchmark's 3.1 percent gain.

Iphone dependence
Hon Hai's reliance on Apple has been cited as both benefit and hindrance by commentators. Smartphones such as the iPhone command high prices but have already become widespread in advanced economies

Researcher IDC projects worldwide smartphone sales to grow 19 percent this year from 39 percent last year, slowing to an average of 11.5 percent over 2014 to 2018. The quickest growth rates are in emerging markets, where low-end models dominate.

"Slowing sales could be a cap on Hon Hai's revenue in the future," said Yuanta Securities analyst Vincent Chen. "That's why you've had [company chairman] Terry Gou say it needs to look for other sources of growth."

In a departure from manufacturing, Hon Hai expects to begin operating a fourth-generation (4G) mobile telecommunications network this year and has hired thousands of software engineers to work on cloud computing initiatives.

But reliance on Apple is still likely to be a boon, with the release of a new-model iPhone later this year. Citi analyst Wei Chen expects Apple to order 90 million handsets from Hon Hai in 2014, nearly double the orders for the iPhone 5s.

The next iPhone is likely to have a larger screen than its predecessors. This could unlock a substantial consumer base put-off by the current models' small screens compared with rival offerings from Samsung Electronics Co Ltd, Chen wrote in a recent report.

"We believe the iPhone 6 could be the biggest product cycle that Hon Hai has yet seen," Chen wrote.

© Thomson Reuters 2014