Updated: Jan 12, 2019
- Part 2
Read Part 1 here: https://www.valueinvestingcollege.my/blog/apple-runs-into-the-great-wall-as-stock-tumbles-nearly-40
The significance of the Asian market over Apple cannot be any more distinct after the effect of Apple’s lower-than-forecasted revenue shook tech companies across Asia to their core. According to the co-head and managing director of Asia Pacific technology, media, and telecom research at J.P Morgan, Gokul Hariharan, China consumers have conquered between 20% to 30% of the global tech demand in various products including smartphones, tablets, PCs and other consumer electronics products, representing the biggest market in the categories of smartphones and TVs. Consequently, China’s slowing consumption will very much impact the tech space around the world.
As for Apple’s recent struggle, the iPhone lineup which accounts for 60% of Apple’s sales, delivered below par performance especially the new iPhone XR model. From assemblers to display suppliers to the manufacturer of the phones, etc., many of these companies were affected by the smartphone sales trend. Majority of them are located across Asia such as Japan, Taiwan, Singapore, Malaysia and so forth.
From Apple’s 2018 annual report, the net sales in Greater China, Japan and Asia Pacific are rapidly growing relative to America and Europe, particularly Japan which went from a negative 8% decline to a positive 16% growth. This goes to show the massiveness of the Silicon Valley giant in Asia which also mean that a plunge in its share price will crush investors worldwide.
As we zoom closer into our local market, there are several Malaysian tech companies that were brutally battered by Apple’s announcement, namely:
1. Inari Amertron Bhd (KLSE:Inari)
Known for its semiconductor assembly, test services and electronics manufacturing services, Inari Amertron Technology plunged to a 1-year low of RM1.27 last week as its trading volume skyrocketed to 85.2 million units, highest level since year 2014.
The huge impact on Inari Amertron Technology was mainly because 46% of its revenue accounts from the production of radio frequency (RF) parts to Apple. However, according to Tan Kai Bin, AmInvestment Bank Research Analyst, investors should remain confident with Inari’s plans for revenue diversification as they play to grow its LED (Light Emitting Diode) for digital billboard business which can possibly scale further than its RF division.
Despite also having other clients which most investors are not taking into consideration, however the question remains as to how significant are these client-companies contributing to Inari’s revenue growth compared to Apple.
2. Globetronics Technology Bhd (KLSE:GTRONIC)
Similar to Inari Amertron Bhd, Globetronics Technology Bhd tumbled nearly 14% to a 2-year low of RM1.48 due to Apple’s revenue cut forecast. Globetronics Technology Bhd is known for their development and manufacturing of integrated circuits, LED (Light Emitting Diode) components, timing devices, sensors, encoders and so forth with sensors being the leading contributor of its revenue. In this case, Globetronics is the producer of Apple’s gesture sensor component.
The reason behind the drop was because of its high concentration of production only to a few clients. This becomes relatively identical to the incident that occurred several months ago in which Globetronics dropped by 9% after Apple Inc announced that they would use 20% lesser parts in its latest iPhone generation. This comes to show that Globetronics typically has no competitive advantage over Apple Inc and the dependency towards limited influential clients can be a major drawback for the company.
3. KESM Industries Berhad (KLSE: KESM)
Operating through burn-in, testing and electronics manufacturing services, KESM turned out to be another falling comrade of Apple’s despair. Several months ago, when Apple decided to slash orders for their iPhone XR, XS, and XS Max products, major suppliers were the first to experience the wave followed by semiconductor companies. As a result, KESM went falling to a 2-year low.
Inari and Globetronics were some of the few companies that took a huge toll on Apple’s loss. Along with them were several semiconductor manufacturers such as KESM Industries Bhd and ViTrox Corp Bhd that dragged the Bursa Malaysia Technology Index down by 2.94%. Nonetheless, Apple’s revenue apparently did not strike as a huge surprise to suppliers. Many suppliers were aware of Apple’s gradual cut in their product parts order. The announcement of Apple’s revenue cut was merely a validation of what suppliers were predicting.
All in all, we believe that despite Apple’s impact on Malaysian Tech companies, it is safe to say that our local players are not entirely dependent on Apple supply chain as they are also exposed to the Chinese and Korean smartphone makers. However, as value investors, it all comes down to having the confidence before investing in any of these companies, and to attain that confidence, it is our job to understand the fundamentals of the businesses in terms of its business moat, management standards, future growth prospect and many more. Simply relying on sentiment-triggered news is merely gambling and speculating. Thus, be sure to exercise due diligence and invest rationally because ultimately, the best holding period is forever.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.