Hon Hai Earnings: Demand for AI Servers Strong; Fair Value Estimate Increases 17% to TWD 122

No-moat Hon Hai’s 2023 result was weak on revenue, down 6% year on year, but improved product mix and a focus on inventory and cost control allowed operating income to decline only 4% year on year. Strong nonoperating income growth allowed net profit to be broadly flat. Hon Hai’s stock price has risen around 19% over the two weeks leading into the result, which seems to be related to bullish sentiment toward artificial intelligence, or AI-driven demand for Foxconn Industrial Internet's, or FII’s servers that are used by corporates and in data centers. While Hon Hai saw “significant growth” in revenue in February from this source, consolidated Hon Hai revenue in February was down 12.3% year on year, with cumulative revenue growth for the first two months down 17.7% year on year. Growth in the cloud and computing products segment has, so far this year, been more than offset by declines from the smart consumer electronics segment—mainly Apple smartphones—and the computing products segment, due to lukewarm PC market demand. Nevertheless, we upgrade our fair value estimate for Hon Hai to TWD 122 per share from TWD 104, due to upgraded forecasts from the inclusion of more aggressive assumptions for growth from the AI servers business, particularly in the outer years of our forecasts. We see Hon Hai’s shares as currently fairly valued.