|June 15, 2017 10:00 am JST|
Apple suppliers drive Taiwan's market rally
Largan Precision tops Nikkei Asian Review's latest corporate power ranking
CHENG TING-FANG, Nikkei staff writer
TAIPEI Apple suppliers are flying high on Taiwan's stock market -- and turning in standout performances according to the Nikkei's latest Asia300 ranking of power performers.
The island's benchmark Taiex index on May 11 closed above 10,000 for the first time in 17 years. Much of the credit goes to the component manufacturers: Over the past 12 months, seven of the nine Taiwanese Apple suppliers on our watch list have posted gains greater than 20%, outperforming the overall market's 17% rise as of the close of trading on June 9.
Currently, seven of the 25 most valuable stocks listed in Taiwan are Apple suppliers.
Largan Precision, the highest-priced stock in Taipei, placed first in our proprietary ranking of more than 300 Asian companies. The company supplies camera lenses for high-end smartphones to Apple, along with Chinese competitors Huawei Technologies, Oppo and Vivo.
Taiwan Semiconductor Manufacturing Co. and Catcher Technology joined Largan in the top 30. Fifth-ranked TSMC is the world's largest contract chipmaker, with a 56% market share, and has dominated orders for iPhone core processors since last year. Catcher, which placed 14th, provides metal casings for iPhones and MacBooks.
SECRETS OF SUCCESS For 2016, Largan posted a lucrative gross margin of 67%. It looks poised to continue dominating the supply of camera lenses for premium handsets, since there is no competitor in sight that can match its technology and production efficiency, according to Yuanta Investment Consulting analyst Jeff Pu.
Pu said Largan accounts for about 90% of iPhone lenses, while Japan's Kantatsu provides around 10%. As for high-end handsets from Chinese brands, the Taiwanese company has a roughly 95% market share.
"Largan could continue to be a market leader, as it is well-known for its secrecy and strict measures to avoid technology leaks," said Sean Kao, an analyst at IDC. "Every engineer who works there only would know a very limited part of the whole production process. ... That's why even if competitors poach talent from Largan, they can hardly figure out the whole process soon."
TSMC, which logged a 50.1% gross margin for 2016, is also on a firm footing.
With a market capitalization of 5.4 trillion New Taiwan dollars ($178 billion), the chipmaker's weighting in the Taiex comes to more than 18%. It has generated the highest net profit among all Taiwanese companies over the last 15 years.
Morris Chang, TSMC's founder and chairman, on June 8 said his company will continue to outpace the rest of the chip industry. He sees potential for 5% to 10% growth in both revenue and net profit until 2020; the overall semiconductor industry expanded about 1.5% last year, according to research company Gartner.
"We have three key advantages," Chang said, "as we lead in chip technologies, have excellent know-how in manufacturing that our competitors cannot match, and we maintain great customer relations." TSMC counts some 450 customers worldwide, including Apple, Qualcomm, Nvidia, Broadcom and MediaTek.
Still, Chang stressed he would not underestimate Intel and Samsung Electronics, TSMC's two main rivals. The U.S. and South Korean tech companies are eager to seize TSMC's turf in the foundry business -- the practice of making chips on behalf of others.
Rick Hsu, an analyst at Daiwa Capital Markets, said TSMC's shares still have room to rise in 2017, as it is the sole chip supplier for the new iPhone range coming out later this year. It also continues to win orders from Nvidia, a U.S. chip designer moving to capitalize on the computing needs of artificial intelligence.
The outlook is murkier for Catcher. Investors turned pessimistic about the metal casing supplier last year, due to Apple's decision to go with glass backs for the upcoming iPhones. But Catcher was able to make a new arrangement with Apple, covering the assembly of the glass backs and metal frames, according to industry sources.
The move brightened investor sentiment in the first half of this year. But Catcher's profit margin is still expected to take a hit, since the company stands to make less from assembly than if it were supplying whole components, Yuanta's Pu said.
In any case, the suppliers' stocks may be in for some turbulence. As the launch of the new iPhone lineup nears, Pu said investors will "start to take profits from stocks of these Apple suppliers, and wait until an appropriate time later in the year to see whether the demand is as robust as expected."