Wed, Aug 12, 2015 - Page 14 News List

Devaluation of yuan good for Hon Hai and Pegatron

Bloomberg

Apple Inc suppliers Hon Hai Precision Industry Co (鴻海精密) and Pegatron Corp (和碩) are to benefit from a surprise devaluation in China’s currency because both pay a major share of their workforces in yuan and sell in US dollars.

The People’s Bank of China devalued the yuan by the most in two decades, a move that may help shore up margins at Pegatron and Hon Hai, which assembles the iPhone and other Apple Inc devices and gets half its sales from the US company.

“Assuming that revenue doesn’t change and suppliers don’t have to pass the benefits on to Apple, the yuan cut should boost margins for the suppliers,” said Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein.

The suppliers’ gross margins, which measure the ratio of sales left after production costs, could climb as much 0.5 percentage points after dollar-denominated sales are converted into yuan to pay off local workers and other costs, Moel said.

The full magnitude of the yuan’s depreciation would not get passed on to Apple because many of the two suppliers’ costs are still denominated in the US currency, he added.

Hon Hai depended on Apple for half of its US$139 billion in revenue last year. It employs more than a million workers in China during its peak season to assemble iPhones, iPads as well as game consoles, PCs and televisions.

“A yuan cut is going to soften the impact of Apple’s weak outlook because if there’s no room to boost top line, then at least the currency change can help their bottom line,” Moel said.

Hon Hai and Pegatron declined to comment on the impact of the yuan devaluation.

China is Apple’s largest market after the US, a region the iPhone maker is counting on to sustain its growth.

The Greater China area, including Hong Kong and Taiwan, accounted for US$13.2 billion or 27 percent of the company’s second quarter revenue.

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