Smartphones: iPhone A Swing Factor In A Period Of Weak Demand

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Includes: AAPL, SSNLF, XI
by: Hyundai Motor Investment & Securities
Summary

Smartphone demand in 2018 to rise 1.8% YoY to 1.51bn units despite stagnant demand in 1H.

Growth in smartphone demand to pick up to 4.6% YoY from 2020 as subsidies for 5G expand.

Since 2017, Apple’s sales growth has been driven by ASP rather than volume.

The company’s ASP-driven sales growth strategy should continue, even considering the expected product mix with the new iPhone and lower-than-expected initial order volume.

Premature to reflect skepticism about new iPhone; bargain-hunting remains a valid strategy.

2018 smartphone demand to rise 1.8% YoY to 1.51bn units despite slow 1H demand

Weak smartphone sales in 2Q18 is adding to skepticism about overall smartphone demand. We forecast smartphone demand in 2Q18 to slide 2% YoY to 347mn units, another decline in (sell-out) volume since 4Q17. For the full year, however, we expect smartphone sales to edge up 1.8% YoY to 1.51bn units given the likely surge of demand for the new iPhone and new models by Chinese smartphone makers in 2H18. Smartphone demand should remain weak until 2019 because of the saturation of the smartphone market and reduced LTE service subsidies in many countries. Growth should recover to about 4-5% YoY from 2020 when subsidies for 5G expand. Meanwhile, the sluggishness of smartphone demand is changing the industry’s structure in two key ways: First, market shares (by volume) of China’s big four (Huawei (HUAWEI), Xiaomi (XI), Oppo, and Vivo) are growing, whereas smaller names that have not established economies of scale are being consolidated because of escalating cost burdens. Second, Samsung’s (OTC:SSNLF) market share is contracting relative to Apple (NASDAQ:AAPL) as demand for high-end smartphones rather than ultra-high-end smartphones declines. Samsung’s S9 Series is expected to report the lowest sales volume in its launch year since the Galaxy S3.

Premature to reflect skepticism about new iPhone; top pick LG Innotek

As such, we expect Apple and China’s big four to exert bigger influences on smartphone demand going forward. Driven by OLED demand, Apple’s influence on the Korean smartphone supply chain has increased since 2017, and we expect sales of the new iPhone, by model, to determine the direction of earnings for Korean suppliers. The rumors that parts orders made for the new iPhone in 2H18 were fit to produce 40mn units of the LCD model and 40mn units of the OLED model worked to stoke fears about the earnings of affected suppliers. As we found out, the new OLED display iPhone is likely to be released just ahead of the LCD model. There were rumors that the LCD model would be released in November because of yield issues of BLU for the LCD notch model, but the company now appears to be targeting an October launch. Considering Apple’s enhanced SCM practices, the actual production volume could well surpass the currently planned volume of 80mn units, depending on demand. Apple may deliberately signal a rise in the LCD model potion with the intention of reducing component prices for the OLED model. However, since 2017, ASP has been the major contributor to Apple’s smartphone sales growth while sales volume actually declined. If Apple raises the proportion of the LCD model drastically when smartphone demand is not as upbeat, the company may see its smartphone sales fall. Given the complicated market conditions, we believe it is premature to reflect skepticism about the new iPhone. That said, we continue to present LG Innotek as our sector top pick for its relatively lower exposure to display specifications.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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