February 20, 2018 / 5:07 AM / 25 days ago

Breakingviews - Foxconn is manufacturing a higher value in China

By Robyn Mak

Terry Gou, founder and chairman of Foxconn reacts during an interview with Reuters in New Taipei City, Taiwan June 12, 2017. REUTERS/Eason Lam

HONG KONG (Reuters Breakingviews) - Foxconn is aiming to manufacture something different in a new location. The Taiwanese assembler of Apple’s iPhones plans to spin off a subsidiary in Shanghai. Fresh funds will help it push into new technologies. Given the nature of stock trading in China, it also could be retooling its valuation.

As smartphone demand slows, boss Terry Gou is eyeing new areas of growth for his $52 billion contract builder of electronics. Essential to the idea, which he has dubbed “8K+5G” – referring to next-generation display and wireless protocols, respectively – is Foxconn Industrial Internet. The Shenzhen-based subsidiary makes telecommunications network equipment, cloud computing components and industrial robots for titans from China’s Huawei to Amazon.

Gou is now enlisting mainland China investors to help him move up the supply chain. Details of the initial public offering haven’t been disclosed yet, but early documents show that the division intends to use proceeds to fund over $4 billion of projects in the People’s Republic, ranging from developing remote servers to smart-manufacturing systems to data centres. Access to Chinese capital markets could help Gou achieve a long-held ambition of becoming a service provider and not just a manufacturer.

The spinoff also could be significant for the Taiwan-listed parent, formally known as Hon Hai Precision Industry. Companies that list on the Shanghai Stock Exchange typically price their shares based on an unofficial rule of thumb of 23 times earnings over the previous 12 months. Based on the Foxconn unit’s 2017 net profit, it could be valued at 373 billion yuan, or nearly $59 billion. That would surpass the parent company’s $52 billion market capitalisation.

Foxconn shareholders will have less of a claim on a fast-growing business. Analysts reckon Foxconn Industrial Internet accounts for over half the bottom line. As a result of the spinoff, net profit attributable to the parent would fall and shrink earnings per share by as much as 15 percent, Arthur Liao at Fubon Securities estimates.

Over the long term, though, Foxconn should benefit from richer valuations in China. Shares of the Taiwanese group trade at just 11 times historical earnings, far below the mainland’s benchmark CSI 300 index multiple of 25 times. A blockbuster flotation across the strait would be an impressive feat of engineering.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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