Hon Hai Earnings: Demand for AI Servers Accelerating; Valuation Increased to TWD 140 From TWD 122

Hon Hai’s first-quarter 2024 result was broadly in line with our expectations. Still, the outlook was better than expected, driven by strong artificial intelligence-related demand for Foxconn Industrial Internet servers used by corporates and in data centers. First-quarter revenue declined by 9.5%, with gross profit declining by 5.3% and operating profit decreasing by 9.3%, all on a year-on-year basis. However, we note that April revenue was up 19% year on year on the back of March revenue increasing 11.8% year on year, so recent momentum is strong. For 2024, management is guiding for flat revenue from consumer electronics and computing products, which contributed 72% of Hon Hai’s revenue in 2023. It is guiding for strong growth from cloud and networking products and components and other products, which contributed the remaining 28% of 2023 revenue. Management indicated in this result that “in terms of visibility for 2024, we are seeing better performance than we expected in March.” This is mainly due to strong AI server demand, with AI server revenue increasing at nearly 200% year on year in the first quarter, and it expects this growth to improve quarter over quarter. We estimate that AI servers currently contribute about 5% of Hon Hai’s revenue.