There has been much discussion in the past few years about the saturation of the smartphone market, as manufacturers struggle to create incentives for customers to upgrade their devices, but now one analyst says the “late smartphone” era poses new risks for supply chains.
Jeff Pu (蒲得宇), head of Asia hardware research at GF Securities (Hong Kong) Brokerage Ltd (廣發證券香港), said in a report on Wednesday that his research team expects most supply-chain firms to face margin risks in this cycle.
“We expect the late-smartphone era to be characterized by muted demand, original-equipment manufacturer [OEM] consolidation and a deceleration in technology migration, and we see risks to margins for most supply chains from the second half of 2018 to 2019,” Pu said in the 36-page report, which came two weeks after Apple Inc’s new iPhone XS and iPhone XS Max hit the market.
Global smartphone shipment growth is expected to remain flat for two years, before seeing a mild recovery in 2020 on the rollout of 5G networks, the report said.
That compares to a 10 percent increase in 2015 and 2 percent growth in 2016, said Pu, who joined GF Securities from Yuanta Securities Investment Consulting Co (元大投顧) last month.
“The slowdown is a result of near-saturation in smartphone penetration in most developed markets and China, together with a slowdown in technological innovation, meaning users upgrade their smartphones less frequently,” he said.
The first expected effect is consolidation in market shares among the six leading brands — Apple, Samsung Electronics Co, Huawei Technologies Co (華為), Oppo Mobile Telecommunications Corp (歐珀), Vivo Communication Technology Co (維沃) and Xiaomi Corp (小米), which have a collective global market share of 75 percent, up from 72 percent in the first quarter of this year and 66 percent in the second quarter of last year, the report said.
“We expect smartphones to follow the trend seen in notebooks, in which the top four have had a market share of more than 70 percent since the fourth quarter of 2015, and we expect smaller brands to continue to be marginalized,” it said. “Leading brand manufacturers’ bargaining power will therefore become stronger than before.”
The second effect is that margin could become a more important issue for most supply chains, in addition to shipment volume, it said.
The research team found key component suppliers in the Greater China smartphone supply chain saw their operating margins decline in the first quarter of this year, and pressure is expected to continue until the end of next year, given the flat shipment growth, the cost pressure from phone vendors and a slowdown in specification migration, especially for iPhones, the report said.
The third effect is that manufacturers increasingly need differentiated products to attract consumers and might spend more on optical upgrading, fingerprint on display and semiconductor content for their devices, which would further squeeze spending on other components and add extra pressure to supply chains, it said.
GF Securities has “buy” ratings for Largan Precision Co (大立光) and Sunny Optical Technology Group Co (舜宇光學), the report said.
“For Largan, we expect its ‘new weapon’ to help it gain traction in front cameras, given its better full-screen design,” it said, referring to the firm developing “pure black lenses,” which have a special black coating to enhance decices’ appearance.
“We believe one to two major smartphone OEMs will adopt the pure black lens for front cameras in the first half of 2019, as the black design enhances the full-screen appearance. We believe this will help Largan to gain traction in front cameras, in which Largan has a limited presence,” it said.
Largan shares were down 6.07 percent last week and closed at NT$3,635 on Friday.
GF Securities has a 12-month target price of NT$4,900 on Largan, valuing the stock at 20 times its estimated earnings per share of NT$245.3 next year.
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