Greater China smartphone:The million-dollar question on iPhone launch,profit-taking or add positions

Mixed views from investors on the new iPhone launch

    Apple will release the new iPhone on 12 Sep. 9AM, PDT (13 Sep. 1AM, HK time). At this time of year, there is always the question of “should one take profits” or “should one add to positions”. We believe taking profits could work n-term, but taking a larger position should prevail for the long run. Historical data (Fig. 1) shows tier-one Asian iPhone suppliers tend to underperform for two months post a release event, as most new phone features have been widely anticipated. However, most of them tend to outperform after near-term bumps, as Apple impresses the world with new features in next year’s iPhone. For the 2018 new iPhone, the new feature could be the advanced AR.

    Why profit taking make sense in the near term?

    Similar to prior years, after all new features have been widely discussed (an OLED display, a front-facing 3D sensing, wireless-charging, and double-sided glass designs), the knee-jerk reaction from trading-oriented investors would be “take profits now, and add to positions later if the new iPhone sell-through proves to be good”. As illustrated in Figure 1, over the past five years, the share prices of tier-one iPhone suppliers in Asia surged 7% in a two-month period prior to the new iPhone release date, but declined 0%-4% for two months after the launch date.

    Who could be relatively vulnerable post the new iPhone release in 2017?

    In our view, iPhone component suppliers in Hong Kong/China could be more vulnerable to profit taking. Their share prices have rallied 14.7% on average over the past one month (Figure 2). On the other end, it seems profit taking on Taiwanese names are already in place, with Catcher and Hon Hai’s share prices down 3.4% and 0.4%, respectively, over the past month (vs the TAIEX’s rise of 2.6%).

    Why we recommend adding more to positions for the long term?

    For the long term, we continue to like tier-one iPhone component suppliers, as they are in a better position to capture the iPhone’s spec upgrade cycle. Figures 3-6 show the share prices of tier-one vendors have consistently trended up over the past five years despite near-term profit-taking. For the new iPhone in 2018, advanced AR (Augmented Reality) could be the new feature in our view, enabled by the addition of a rear-facing 3D sensing module. Also, Apple might bring the full display design (which only appears in the premium SKU in 2017) to every new iPhone SKU in 2018.

    Top buys, valuation and investment risks

    Largan and AAC are our preferred iPhone 8 beneficiaries from a top-down perspective (ASP hike, resulting from spec upgrades) in our Greater China coverage. From a bottom-up view (share gain potential), Catcher is our favourite, as we estimate its market share in iPhone casings will likely grow from ~18% in 2016 to ~35% in 2019E. Our target prices are derived from PER or PBR (see page 5 for details). Downside risks include weak iPhone demand, aggressive price cut and slow spec upgrades.