Hon Hai Precision Industry Co. Ltd.

The stable outlook reflects our view that Hon Hai could moderately restore its profit margin over the next one to two years. This could be supported by improving iPhone sales, the company's growing Integration, Innovation, Design, Manufacturing business model (IIDM), and demand for higher-margin products such as cloud servers in 2021-2022 following a mild recession in 2020 amid COVID-19. This also reflects our base case assumption that Hon Hai can largely withstand profitability pressure and sustain its return on capital at 13%-16% over the next one to two years. In addition, the stable outlook reflects our view that Hon Hai could generate significant free operating cash flow and sustain a net cash position on an adjusted basis over the same

...Hon Hai could sustain its significant market leadership despite Apple's ongoing supplier diversification. Hon Hai Precision Industry Co. Ltd. could face rising competition pressure over the next two years as Apple Inc. continues to broaden its outsourcing partners for assembly services and components supply. Apple is also likely to expand its order allocation to Chinese makers to better withstand rising risks from trade disputes between the U.S. and China. However, we do not expect Apple's diversification plan to weaken Hon Hai's operating performance significantly over the next one to two years, given Hon Hai's leading manufacturing technology and efficiency. We also expect Hon Hai's sizeable market share leadership to remain intact over the same period. Nonetheless, this could continue to cap Hon Hai's margins before the company can significantly increase its revenue from differentiated components and design services. Hon Hai's return on capital will likely remain at 13%-16% over the...

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