China Hardware Technology:Apple 3Q16in-line,4Q guidance beatbut supply shortfalllingers

Apple’s CY3Q16 iPhone in-line but miss on iPad/Mac.

    Apple (AAPL US, NR) released in-line CY3Q16 results with revenue of US$46.9bn (-9%YoY), same as consensus while net profit was US$9.0bn (-16%YoY), slightly beating consensus of US$8.9bn by 1%, attributable to higher-margin service revenue growth of 24%YoY. iPhone shipment came in at 45.5mn (1/ 3% above consensus/ our estimates). iPad missed on lower ASP of US$459, 7% lower than consensus while Mac shipment 14% decline was more severe than expected, missing consensus by 4%.

    4Qguidance beat,butiPhone 7supply constraints may linger.

    Apple expected positive revenue growth to resume in CY4Q16E and guided a revenue range between US$76-78bn (0-3% YoY growth), slightly above market expectation of US$75.3bn (-1%YoY) while iPhone ASP is guided to improve QoQ as iPhone 7 Plus ASP is US$20 higher than iPhone 7. Tim Cook commented that the new iPhone demand is robust, in particular, China sales will be significantly better YoY in CY4Q16E. However, he also mentioned that demand continues to outstrip supply, especially for iPhone 7 Plus. We believe the supply constraint is well-known to the market due to the shortage in dual-cam components from LG Innotek and the supply issue may linger till CY1Q17. However, given positive CY4Q16E guidance, we do expect market to slightly revise up iPhone shipment estimates in CY4Q16E.

    ReiterateBUYon AAC/ Tongda and ST trading on Cowell.

    Apple share price dropped 2.8% after market closed today, we attribute the decline to 1) profit taking (share price up 15% since iPhone 7 launch) and 2) investors unsatisfied with CY3Q16 revenue mix given miss on iPad and Mac, despite higher service revenue. However, we maintain BUY on Apple supply chain listed in Hong Kong market as 1) AAC/ Tongda/ Cowell are more iPhone-focused and CY3Q16 iPhone is in-line, with positive CY4Q16 iPhone 7 outlook and 2) AAC Tech/ Tongda/ Cowell valuation is attractive, AAC Tech/ Cowell share price was down by 14%/ 10% post iPhone 7 launch. We remain positive on 1) AAC Tech (stereo waterproof speakers/ haptics), 2) Tongda (new Apple waterproof component supplier), and 3) Cowell (iPhone 7 front-cam upgrade/ iPhone SE rear cam).