Taiwanese manufacturer Hon Hai Precision Industry could be a big winner in Apple’s supply chain in the next round of iPhones expected to be launched later this year, according to investment bank JPMorgan.
OLED refers to organic light-emitting diodes that experts say offers brighter displays and better power efficiency over the standard LCD — liquid crystal display — screens.
In a Tuesday note, JPMorgan’s Asia tech analyst and head of Taiwan equity research, Gokul Hariharan, said the bank expected Hon Hai, a top assembler of iPhone handsets, to be the sole supplier for the new 5.85-inch OLED model, while retaining a smaller share in the 5.5-inch display handsets. This, along with better average selling price, should help Hon Hai’s market share in iPhone assembly to stabilize in the upcoming model cycle, according to the bank.
“This is our assumption as of now that (Hon Hai) will handle all of the (newest) iPhone assembly. Historically, they have handled the most advanced product in most iPhone cycles,” Hariharan told CNBC on Wednesday.
Earlier in the week, JPMorgan’s Apple analyst, Rod Hall, said the bank was more optimistic than the rest of Wall Street when it comes to the next iPhone.
Hariharan said in the note that Hon Hai should also see some margin improvement in 2017 thanks to better revenue scale and a higher degree of automation. Meanwhile, the bank doesn’t expect Hon Hai to bankroll any potential investments on its own, but rather with partners. JPMorgan is currently overweight on the company and increased the price target for the stock to 107 new Taiwan dollars ($3.54) from 100 new Taiwan dollars.
Among the other major assemblers of iPhones, JPMorgan remained overweight on Pegatron, stating there will likely be more room for volume growth in the next two iPhone cycles thanks to the company’s increasing market share in the smaller iPhone models. The market share within iPhones is expected to peak at 33 to 35 percent for Pegatron.
“We anticipate Pegatron having 100 percent (share) in the iPhone 7S 4.7-inch in the upcoming cycle and keeping a majority market share in the smaller size OLED model in the next model cycle,” Hariharan wrote in the note.
For Wistron, market expectations of strong profitability improvement in the smartphone business were too aggressive, according to the note. “In addition, Wistron’s share wins in iPhone appear to be coming mainly for the iPhone 7S 5.5″ LCD model, which could be significantly cannibalized by the OLED iPhone.”
Hariharan told CNBC that, among Apple’s component suppliers, JPMorgan likes the following names: LG Innotek (supplies camera modules), Samsung SDI (OLED display panels), Alps Electric (optical image stabilizers for the dual cameras) and Catcher (metal casing).
These companies, particularly Samsung SDI, are expected to benefit from the upcoming model cycle due to the anticipated upgrades in the iPhone specs.
“The OLED screen is done by Samsung exclusively,” said Hariharan, adding he expected earnings to expand as Apple rolled out more OLED iPhone models in the future.
In February, Korean media reported Samsung Display received a display order from Apple for about 160 million OLED panels, making them the largest supplier to the iPhone maker.
“We are anticipating a meaningful shift towards OLED … in a 2 to 3 year horizon, realistically, every new iPhone model should be OLED-based,” Hariharan added.
Disclosure: Apple is an investment banking client of JPMorgan. JPMorgan owns a position of $1 million or more in debt securities of Apple. JPMorgan also makes a market in shares of Apple, and provides liquidity services for Apple securities.