Following Apple’s launch event, we make no change to our forecasts and fair value estimates for Apple’s suppliers like TSMC 2330 (TWD 850), Sunny Optical 02382 (HKD 107), Luxshare Precision 002475 (CNY 41.50), Largan 3008 (TWD 2,500), and AAC Technologies 02018 (HKD 17). We think the launch is slightly negative to the supply chain. This is due to possible renewed fears that Apple is increasing pressure on its suppliers to maintain its profitability, at the latter’s expense. No-moat Luxshare and AAC should bear the brunt of such pressure, in our view. Sentiment may worsen further as China says it has noticed “security incidents” concerning Apple’s iPhones, reinforcing worries that China may extend its iPhone usage ban to groups beyond civil servants.
Hardware upgrades to the new iPhones are unsurprising. But we like how Apple stressed gaming performance, which illustrates both wide-moat Apple’s design expertise and TSMC’s manufacturing prowess. Support of blockbuster games is a new unique selling point, which may benefit the iPhone’s market share and in turn TSMC’s already dominant chip presence. There is also a small chance (not in our base case) that demand for better graphics performance on phones will spur faster processor innovations. The periscope camera featuring 5 times optical zoom appeared as expected on the Pro Max. This has affirmed our view that camera upgrades are resuming on smartphones, and coupled with the end of inventory correction, should bode well for Sunny and Largan.
Apple raised the starting price of the Pro Max model by $100, but this was due to the removal of the 128GB model, leaving the price of all models essentially unchanged. Given the new features as discussed above, component costs are likely to have increased, raising concerns about increased downward pricing pressure on suppliers with weak pricing power. We think the gross margins of Luxshare and AAC are under pressure as the duo provide little-upgraded components and Luxshare provides assembly services.
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