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Handset/electronics: Apple Supply Chain to See Weak 3Q, Strong 4Q




The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. — Ed.

 

Apple, as expected, did not include its next flagship smartphone dubbed iPhone 12 in the list of new products announced at its September 15 event. At the virtual event, Apple unveiled iPad Air 4, iPad 8, Apple Watch Series 6, and Apple Watch SE. The company also revealed a reinforced lineup for services with Apple Fitness+ (fitness streaming subscription) and Apple One (subscription service bundle).

Apple expanded its low/mid-priced mobile lineup, showing a strong commitment to increasing market share in mid-range and entry-level segments. It also strengthened its comprehensive platform business with the launch ofa new service package called Apple One, respoding to COVID-19-sparked changes in consumer behavior. The iPhone 12 will likely launch in a separate event slated for October.

Focus on iPhone effect expected in 4Q20

For the previous iPhone series, parts suppliers raised their capacity utilization rates from July or earlier in June ahead of the September launch. But not in 2020. The release of iPhone 12 models has been postponed due to COVID-19 disruptions and the adoption of mmWave 5G technology.

Apple’s iPhone shipments will highly likely decrease in 3Q20 compared to previous years, driving down the earnings of parts suppliers. However, their earnings are likely to hit an all-time high in 4Q20 along with a rise in iPhone shipments thanks to pent-up demand from the COVID-19 pandemic, new model launch, and iPhone-replacement demand.

Apple supply chain: Recommend buying shares during sluggish 3Q20

Companies in the Apple supply chain used to see share price momentum pick up ahead of the new iPhone launch. With the iPhone 12 release delayed, the momentum is currently weaker compared to the past. But we believe the current sluggishness offers a good opportunity to buy in light of forecasts for strong 4Q20 and 2021 earnings. Investment points are as follows.

① Apple’s parts suppliers will likely report record-high earnings for 4Q20, with order placements (delayed from 3Q20) to come in very strong for initial iPhone 12 production.

② In 2021, Apple’s iPhone shipments are projected to see the first rebound in four years as it benefits from production/sales disruptions at Huawei while recovering from COVID-19 impact.

③ Apple is expected to unveil its first mmWave 5G-enabled iPhone soon. The parts industry has benefited from Apple’s plans for 5G shift since last year. We also focus on iPhone-replacement demand.

Apple-related stocks include LG Innotek, BH, HyVision System, Derkwoo Electronics, ITM Semiconductor, and Samsung Electro-Mechanics. We expect iPhone effect to help improve market conditions for memory chips, display, and other related value chains in 4Q20. We thus retain our OVERWEIGHT view on the IT parts sector.

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