Tags: china | apple | yuan | devalue

China Just Gave Apple's Biggest Suppliers a Welcome Surprise

Tuesday, 11 Aug 2015 11:37 AM

Apple Inc. suppliers Hon Hai Precision Industry Co. and Pegatron Corp. may benefit from a surprise devaluation in China’s currency because both pay a major share of their workforce in yuan and sell in U.S. dollars.

China’s biggest yuan devaluation in two decades could be a boon to the two companies after their biggest customer Apple foreshadowed a potential slowdown of iPhone sales in Asia’s largest economy.

“Assuming that revenue doesn’t change and suppliers don’t have to pass the benefits on to Apple, the yuan cut should boost margins for the suppliers,” said Alberto Moel, a Hong Kong- based analyst at Sanford C. Bernstein.

Hon Hai’s gross margins, which measure the ratio of sales left after production costs, could climb as much 0.5 percentage points because sales are in dollars while Chinese workers and local suppliers are paid in yuan, Moel said. The full magnitude of the yuan’s cut wouldn’t get passed on to suppliers as many components are still denominated in the U.S. currency, he said.

The impact of China’s yuan decision may extend beyond Hon Hai and Pegatron.

Chinese companies with a larger exposure to the local market might lose out from the devaluation, because they get a larger share of their revenue in a weakening currency. Such companies include personal computer maker Lenovo Group Ltd. and smartphone vendor Coolpad Group Ltd., analysts at Jefferies Hong Kong Ltd. wrote Tuesday.

PC Vendors

“Lenovo has been a beneficiary of RMB appreciation over the last few years, which partly explains the consistent improvement in China PC margins,” Jefferies analysts Ken Hui and Cynthia Meng wrote, referring to the yuan’s official renminbi name. “If PC vendors try to raise prices in RMB to protect their margins, end-demand will be hurt.”

As the largest member of billionaire Terry Gou’s Foxconn Technology Group, Hon Hai employs more than a million workers in China during its peak season to assemble iPhones, iPads as well as game consoles, PCs and televisions.

Hon Hai, which is based in Taipei, depended on Apple for half its $139 billion in revenue last year. The U.S. client last month reported iPhone shipments that missed expectations, and forecast sales for the current period that also fell short of estimates.

Apple Outlook

“A yuan cut is going to soften the impact of Apple’s weak outlook because if there’s no room to boost top line, then at least the currency change can help their bottom line,” Moel said.

Both Hon Hai and Pegatron declined to comment on the impact of the yuan devaluation.

Today’s yuan devaluation underscores policy makers’ efforts to support the country’s exporters and combat the deepest economic slowdown since 1990, economists say.

China is Apple’s largest market after the U.S., a region the iPhone maker is counting on to sustain its growth. The Greater China area, including Hong Kong and Taiwan, accounted for $13.2 billion or 27 percent of the company’s June-quarter revenue.

Although sales of the iPhone rose 87 percent in China in that period, disappointing global smartphone shipments and expectations for slower Chinese growth have helped drive Apple shares 4.4 percent lower since its quarterly report in July.

© Copyright 2017 Bloomberg News. All rights reserved.

 
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Apple Inc. suppliers Hon Hai Precision Industry Co. and Pegatron Corp. may benefit from a surprise devaluation in China's currency because both pay a major share of their workforce in yuan and sell in U.S. dollars. China's biggest yuan devaluation in two decades could be a...
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Tuesday, 11 Aug 2015 11:37 AM
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