Goldman's China Team Still Sees Strong iPhone/iPad (AAPL) Growth at Hon Hai; Cuts Numbers on Foxconn on Likely Lower-Price iPhone

March 14, 2013 11:24 AM EDT
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Comments from Goldman Sachs' China team on iPhone/iPad suppliers Hon Hai Precision and Foxconn could have implications for Apple (NASDAQ: AAPL) itself.

Goldman upgraded Hon Hai Precision from Neutral to Buy Thursday, saying it is well positioned to profit from the second stage of smartphone and tablet growth. The firm expects the production rate to recover in 2Q13E in preparation for the new product cycle of next generation iPhones and iPads.

Goldman predicts Apple's contribution to Hon Hai's revenue will grow 7% yoy in 2013. The firm sees iPhone shipments of 175 million unis in 2013 and 251 million in 2014, representing growth of 28% and 43%, respectively. They see iPad shipments of 95 million in 2013 and 120 million in 2014, representing growth of 45% and 26%, respectively. They see ASP coming down 5% for the iPhone in 2013 and 8% in 2014 and down 4% for the iPad in 2013 and 5% in 2014.

In addition to the upgrade and comments on Hon Hai, Goldman lowered estimates on another Apple supplier, Foxconn Tech, as they expect the potential plastic casing adoption in future low-cost iPhones (from metal casing for the current iPhone) to have a significant impact on its earnings. The firm cut 2013E/2014E EPS estimates by 12%/7%.

"We believe Foxconn Tech is not likely to focus on plastic casing as its edge is on metal casing while plastic casing has low entry barriers," the analyst said. "According to our sensitivity analysis, we expect +2%/-2% earnings variation from our base case in 2013E. Yet we expect the shift is to cater to market demand, which is very price sensitive. Foxconn Tech remains captive to Hon Hai and Apple demand for its metal casing business, which accounts for close to 80% of its 2013E profit, in our view."

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