Apple analysts see ‘limited impact’ from Shenzhen iPhone factory shutdown

From a note to Piper Sandler clients by analyst Harsh Kumar that landed on my desktop Monday:

Hon Hai, the major manufacturer of iPhones, announced that its facilities in Shenzhen will be impacted by COVID lockdowns. While Hon Hai assembles ~70% of global iPhone production, the major production hub is located in Zhengzhou, according to Bloomberg. Zhengzhou is currently not facing any COVID-driven lockdowns.

With the March quarter typically being a lower seasonal quarter, we believe any impact on production from the Shenzhen facility could be transferred to other sites, leaving limited impact. We also note Hon Hai manufactures ~30% of its products outside of China, per CNBC.

In addition, we view iPhone demand as sticky, so consumers will wait to make their purchase until any supply impact is resolved. Overall, we do not see a significant impact to iPhone production/ supply due to the current lockdown situation in China.

Maintains Overweight rating and $200 target. 

UPDATE: In a separate note, Evercore’s Amit Daryanani (Outperform, $210) adds some color and square footage…

Apple’s main production site in Zhengzhou (aka iPhone City) has not been affected. The Zhengzhou production site is ~2.3M sq ft vs 1.5M sq ft for the Shenzhen site (Shenzhen site does manufacturing for several OEMs beyond AAPL) – it has been estimated that Zhengzhou site can manufacture ~50M iPhones /quarter (enough for a seasonally quiet timeframe). The shutdown comes during a time when seasonal demand is generally lower, which should help mitigate any impact.

My take: Like I said…

See Apple iPhone production rolls on despite Foxconn’s Shenzhen shutdown

6 Comments

  1. Cy Manning said:
    All sounds good, but how about hearing something from Mr. Cook and company. In 3 mos we’ve been through inflation, interest rates, Putin’s War, Foxconn shut downs and probably more . . . all of which has resulted in a 20% drop and it’s just silence. No reassurance or context. Just letting the stock and investors be fed to traders.

    0
    March 14, 2022
    • Robert Paul Leitao said:
      CY: In my view, last week’s special event was a grand slam for the company. If that didn’t move the proverbial needle, any announcement from Apple about a lack of interruption of the supply chain won’t do much either. Because Apple is so widely held and is so actively traded, it pretty much serves as an “ATM for the market” when investors get skittish. I see it as a very attractive trading range for long-term investors to acquire shares and an excellent opportunity for Apple to repurchase shares. We’ve been through this before. In the end, long-term shareholders benefit the most form these episodes though they can be unpleasant.

      2
      March 14, 2022
      • Cy Manning said:
        Hi Robert, always enjoy your commentary here.

        Agree this individual item is not significant, but supply chain seems another area where AAPL cedes the narrative (e.g., earnings guidance, App Store, COVID impacts, product launches (due to leaks), product roadmap).

        AAPL is predictably silent at all times and predictability encourages manipulation and volatility . . . and volatility begets greater volatility. I don’t believe AAPL needs to put forth much effort heading off or refuting rumors – and certainly not even close to a majority of them. Unpredictability is a strategy (Mr. Jobs did that well). As AAPL is increasingly reliant on more people to hold more of their portfolio in AAPL, reducing volatility would be accretive.

        This production shutdown is an example of something incredibly easy to address . . . a three sentence press release in advance of it going public would have been sufficient. (AAPL must have been aware of this hours before it was public.)

        In re ‘ATM to the market’, I’ve seen that claim for some time but have yet to see substantiation. (Would be happy to pointed to studies.) I believe it’s an optimistic take on why market players sell. Rather IMHO, the simple take is that AAPL is historically volatile and it’s a natural reaction to exit the stock when downside risk increases.

        I’ve been significantly long AAPL since 2008 and have been through this cycle over-and-over. I know it will recover but the volatility is tiresome and I’m currently tax trapped.

        Thanks again for your insightful contributions here.

        0
        March 15, 2022
  2. Daniel Epstein said:
    The market’s reaction is not really based on accurate reporting. News makes it sound like Apple has stopped all production even when they hear it is not. Negativity about Apple gets more attention even if the actual event will have little or no impact on the company over time. If Apple has nothing to say it is probably too soon if there is no material effect on the company. A falling stock is considered a knock on the company even if the reported results are not what the speculation expected. With Apple trading around 150 today it is now around 18% off the high. Even given all of the bad news about Ukraine, China etc it is doubtful Apple’s earnings over the next 20 years will be 1/5th lower because of these issues. Seems like an overreaction and likely a good time to start averaging in if one has cash they need to put to work. Since I am overweight Apple I don’t plan to accumulate more but I wouldn’t be surprised if the stock bounces up again soon.

    2
    March 14, 2022
  3. Robert Paul Leitao said:
    Just an aside, the announcement of new iPad models at last week’s special event suggest the supply chain challenges Apple faced in the December quarter have all but disappeared.

    2
    March 14, 2022
  4. Brian Loftus said:
    Lots of headwinds – hard to rank them. Feel free to talk me off the ledge…

    1) Expansion of current war to include NATO – not likely unless Nato provoked – i.e. they will let Ukraine lose before getting directly involved
    2) Putin uses tactical nukes – not likely at all but possible if Russia is losing
    3) China attacks Taiwan – hard to rank this one –
    4) Shortage of neon – I certainly did not know that more than 1/2 of the World’s supply of neon is from Ukraine. Seems all but assured unless war ends without major damage to production facilities – https://www.reuters.com/technology/exclusive-ukraine-halts-half-worlds-neon-output-chips-clouding-outlook-2022-03-11/
    5) Inflation – Present pre-war, worse during war – I will leave out the politics but the administrations response to me is baffling
    6) World wide recession – high energy prices is already impacting some countries –

    I agree that on my threat matrix to Apple Stock – this does not even rate

    0
    March 14, 2022

Leave a Reply