Parts Stocks Hit Hard by iPhone Production Disruptions

Labor Shortage at Foxconn Factory in China
Projected Production Shortfall of 6 Million Units This Year
LG Innotek and BH Stock Prices Decline

[Asia Economy Reporter Kwon Jae-hee] The outlook for production volume of Apple's premium smartphone model, the iPhone Pro, is expected to decline significantly, casting a shadow over our component suppliers as well. This is due to labor attrition and protest incidents at Foxconn's Zhengzhou plant in China, Apple's largest partner. However, some analysts suggest that unlike in the past, our component stocks are showing a decoupling trend from Apple, so the concern level is not high.

On the 28th (local time) in the New York Stock Exchange, Apple closed at $144, down 2.63% from the previous trading day. The factor pulling down Apple's stock price was negative news from China. Foxconn's Zhengzhou plant in China, the largest production base for iPhones, is facing a severe labor shortage due to current workers' backlash against China's COVID-19 lockdown policies. According to Bloomberg, this is expected to result in a shortfall of about 6 million units in iPhone Pro production this year. The Zhengzhou plant produces most of the iPhone 14 Pro and iPhone 14 Pro Max models.

Due to the nature of our component stocks moving in tandem with Apple, red flags have been raised for domestic iPhone component stocks as well. According to the Korea Exchange on the 29th, LG Innotek, a representative domestic iPhone component stock, was trading at 297,000 KRW on the KOSPI market as of 9:09 AM, down 2.46% from the previous trading day. Along with LG Innotek, BH, another major component stock, recorded 25,900 KRW, down 0.19%.

Accordingly, the securities industry is lowering expectations. Samsung Securities downgraded LG Innotek's investment opinion to 'Hold' and lowered the target price to 330,000 KRW in a report published that day. Researcher Lee Jong-wook of Samsung Securities analyzed, "With the growth of major customers in the Americas coming to an end, profits are expected to decline for the first time in five years next year," adding, "Although the stock is cheap, it will be deprioritized by investors for the time being."

However, some expect that despite the Apple-related negative factors, our component stocks will show a solid performance supported by strong year-end seasonal demand.

In fact, LG Innotek achieved its highest-ever performance by surpassing 5 trillion KRW in sales for the first time in the third quarter. LG Innotek significantly increased its performance by supplying not only the rear camera but also, for the first time, the front camera and some camera module parts starting from the iPhone 14. Although the camera module business has low profitability, improving specifications has enhanced profitability. BH, a flexible printed circuit board (RFPCB) supplier for iPhones, also recorded its best performance in the third quarter.

Researcher Lee Su-rim of Yuanta Securities stated, "Despite the adjustment in iPhone shipments due to the shutdown of the Zhengzhou plant, BH's RFPCB demand remains robust," adding, "Especially, the expectation for OLED panel supply for iPads and MacBooks starting from the second half of next year is positive."