Asia Technology:Apple supply chain –X marks the spot
iPhone X pre-order demand “off the charts”: Pre-orders for iPhone X appear tohave sold out within minutes of launching. Shipments begin on 3 November, but leadtimes have quickly ballooned to 5-6 weeks – with some Apple (AAPL US, USD163.05,TP USD193.00, Buy) websites, such as in Hong Kong continuing to show “currentlyunavailable”. The official quote from the company was that demand was “off the charts”.
Risk to iPhone 8 shipments? We think the news is confirmation of the likely pent-updemand, which is a positive. However, it also likely supports concerns that iPhone 8demand is relatively weak. Various news sources ranging from point-of-sales data totelecom operators’ commentary on subscriber activations have all suggested weakdemand for iPhone 8 – with some suggesting demand levels nearly half of whatiPhone 7 experienced. Given consensus expects Apple to recognize revenue on>80m iPhones in the December quarter (with less than 20m iPhone X, in our view),there may be increasing risk for total iPhone shipments. While the iPhone 8 and Xshare many of the same components, the mix shift could result in downwardrevisions to those suppliers that are more iPhone 8-centric.
Possible hints that iPhone X constraints are easing: With iPhone X demand nolonger a concern, the focus shifts to supply side constraints. A Wall Street Journalarticle nearly a month ago highlighted production issues with the 3D sensor module;however based on numerous 3Q17 earnings reports over the past week, and strongguidance from companies like AMS (AMS SW, NR) and LG Innotek (011070 KS,Buy) that supply 3D sensor components or modules, yield problems could be behindus. Lastly, some additional news reports (e.g. Barrons, ‘Apple iPhone X ProductionRamps as Face Unlock Issues Resolved, Says Rosenblatt,’ 26 Oct 2017) indicatedoriginal estimated shipment times were pulled in which may also assuage someconcerns about the manufacturing yields ramp and product availability overall.
Favour X over 8 supply chain: HSBC’s tech team favours suppliers levered toiPhone X, e.g. Samsung (005930 KS, KRW2,654,000, TP KRW3,600,000, Buy)(OLED screen), LG Innotek (011070 KS, KRW178,000, TP KRW220,000 Buy)(camera/3D module), and Hon Hai (2317 TT, TWD110.0, TP TWD136.0, Buy)(exclusive iPhone X assembler). We are less positive on iPhone 8 EMS companieslike Pegatron (4938 TT, TWD78.6, TP TWD84.0, Hold) and Wistron (3231 TT,TWD25.4, TP TWD25.0, Hold).