Apple’S New Iphones — Implications for the Supply Chain MEMO

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Apple’S New Iphones — Implications for the Supply Chain MEMO x Country 8 September 2016 Greater China smartphone sector Apple’s new iPhones — Implications for the supply chain MEMO Kylie Huang Apple (AAPL US, USD108.36, Outperform [2]) held a media event on 7 Sept 2016 (10am (886) 2 8758 6248 PDT) in San Francisco to release its new products. Below we summarize what’s the reality [email protected] (what Apple really does) vs. our earlier expectations, as well as our initial takeaways on the implications for the Greater China supply chain. What products were released? – in-line with our expectations. As highlighted earlier, we had expected Apple to unveil two new iPhones (likely iPhone 7/7Plus) and new Apple Watch at the event. Indeed, as we expected, Apple unveiled two new high- end models – the iPhone 7 (4.7”) and iPhone 7 Plus (5.5”) as well as Apple Watch Series 2 at the Sept 7 event. iPhone 7 and iPhone 7 Plus spec – in-line with our expectations. The major spec upgrades we expected for the new iPhones are: faster CPU with larger internal storage, better cameras (dual-cam of 12MP+12MP for iPhone 7Plus, 12MP+OIS for iPhone 7), the inclusion of water proofing, stereo sound quality with receiver upgraded to receiver module, a similar but more streamlined metal casing with a new colour (black), a re-designed antenna, and the removal of headphone jack with option for wireless headphone. The specs came in line with our expectation – CPU upgraded to A10 Fusion 64-bit (40% faster than A9, 2 times faster than A8) with memory options of 32GB/128GB/256GB (vs. 16GB/64GB/128GB for iPhone 6S/6S+), enclosure antenna, the adoption of stereo speakers, the inclusion of water and dust resistance (IP67 protection standard), home bottom which adopts force sensitive taptic engine (by tapping in a new way to trigger new apps i.e reachability for apple pay), with major upgrades in cameras: 12MP (f/1.8 aperture, 6-element lens, OIS) camera on iPhone 7, and for iPhone 7 Plus. The new iPhone features dual-cam of 12MP+12MP(wide angle: f/1.8 aperture + telephoto: f/2.8 aperture, with 6- element lens and OIS), cameras that together offer optical zoom at 2 times and up to 10 times digital zoom for photos. For both models, the front camera has been upgraded from 5MP to 7MP. The new 12MP sensor is 60% faster and 30% energy efficient compared to 6s/6s Plus camera and the larger f/1.8 that allows 50% more lights. The new Quad-LED True Tone flash gives 50% more light and there is a flicker sensor that reaches flickering in artificial lighting. “Live photo” feature let users to add filter or crop them after taking photo and “portrait” is a new function in the camera app, which creates depth of field effect. When photo is taken, a depth map is taken from the picture and applied with a blur on the back ground while focusing on the main figures. Apple will provide free camera app update with the portrait function later this year. The new iPhones also features new retina display that are 25% brighter (wide colour gamut, cinema standard), new colours like jet black(seamless surface) and black replacing space grey, and removal of the headphone jack. Apple introduced a new wireless earpods - Airpods, which uses Apple-designed W1 chip and has infrared sensor and accelerometers to detect when Airpods are in your ears. The Airpods will be available in late October and are priced at USD159. iPhone 7/7 Plus pricing & product roadmap – iPhone 7 in-line with our expectation while iPhone 7 Plus came in slightly lower. Apple set iPhone 7 and iPhone 7 Plus as high-end and kept its iPhone 6S and iPhone 6S Plus as a mid-range model, while continuing to offer iPhone SE as an entry model and stopped offering iPhone 6/6+. The product offering range was in-line with our expectation. In terms of pricing, iPhone 7 price starts at USD649 or USD32.41/month with a 24month contract (upgrade program) Important disclosures, including any required research certifications, are provided on the last three pages of this report. Greater China smartphone sector 8 September 2016 for the 32GB version but the new jet black iPhone 7 will be offered exclusively for the 128GB and 256GB models. – same price as iPhone 6S when released last year, while iPhone 7 Plus starts at USD769 or USD37.41/month with a 24 months contract (upgrade program), also the new jet black iPhone 7 Plus will be offered only on the 128GB and 256GB models. The pricing for iPhone 7 came in-line with our expectation while iPhone 7 Plus came slightly lower than our estimate of USD 800 range. iPhone 7/7 Plus distribution – in-line with our expectations : iPhone 7 and iPhone 7 plus will be available in 29 countries (vs 11 previously for iPhone 6/6S) on 16 September, 2016. These include the US, Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg, Mexico, Netherland, New Zealand, Norway, Portugal, Puerto Rico, Singapore, Spain, Sweden, Switzerland, Taiwan, UAE, UK, and US Virgin Island. The iPhone 7 and iPhone 7 Plus can be pre-ordered from 9 September, 2016. Apple Watch – roughly In-line with our expectation. Same as the first generation of Apple Watch, the Apple Watch Series 2 comes in two sizes (38mm and 44mm), AMOLED display, sapphire cover glass, Bluetooth, and wireless charging. The Apple Watch Series 2 is 11.4 mm measured in height, 8.6% thicker than previous one. The key difference compared to the previous version are the inclusion of water resistance of 50 meters and better speaker and microphone, and most importantly, the inclusion of standalone GPS allowing it to provide better tracking abilities. Apple Watch Series 2 has a dual core processor which is 2 times faster. The new app “Viewranger” utilizes the built-in GPS, to generate hiking routes for users to explore and exercise. Additionally, in cooperation with Nike, Apple will release Apple Watch Nike+ in late October. The new brand will focus on breathability; it shows distance and pace on the main screen while running. Nike will organize joint runner event called Just do it Sunday and Nike runner club to provide customized experience for Apple Watch Nike + users. Pokémon Go is coming on Apple Watch at the end of September. The watch now can provide Eggs’ status on the main screen. During the walk, player can see how much distance travelled and Pokémon nearby. When players approach Pokestops, they can swap and collect supplies directly from the watch. The app also indicates the travel time along with supplies and Pokémon you collect before you quit the app. In terms of availability and pricing, Apple Watch will start from USD 369 and will be available on 16 September, 2016. The specs and pricing range of new Apple Watch are roughly in-line with our expectations. Implications for Greater China Smartphone supply chain: The new Apple iPhone and Apple Watch specs, pricing strategies, and the distribution were roughly in-line with our expectations while the pricing of iPhone 7 Plus was lower by USD 30, which should help spur up demand, in our view. Despite not having many eye catching spec upgrades except better cameras and the inclusion of water-proofing and stereo sound, we look for a strong pick-up for iPhones in 2H16 of 31% HoH (vs. 10% HoH in 2H15) thanks to replacement demand and low base in 1H16. For Apple Watch, we remain our cautious view and forecast of ~10m production volume in 2016. For stock-picking, we continue to suggest investors to buy high- quality component leaders on favourable industry trends with specs upgrades over ODM/EMS vendors due to the muted volume growth in smartphones going forward (see Eyeing spec upgrade trends published on May 10, 2016). In the Greater China smartphone space, Largan (3008 TT, TWD3,720.0, Buy[1]) and AAC (2018 HK, HKD87.60, Buy[1]) are our top picks in the Apple supply chain. Specifically, we like Largan for its dominant position in the high-end lens segment, given ongoing spec upgrades and an expanding addressable market attributed to the rising multi-camera adoption in smartphone (see The more the merrie: multi-cameras are the next mega trend in smartphones). For AAC, we expect the ASP upsides from spec upgrades in acoustics – waterproofing and receiver module (see 2 Greater China smartphone sector 8 September 2016 Benefits from spec upgrade to accelerate from 2H16) and the increasing adoption of haptics in i-devices to provide solid earnings drivers in the coming years, in addition to the ramp-up in contribution from more project wins in non-acoustic RF/mechanical products (see NDR takeaways – multi-growth driver expected). The adoption of dual-cams in iPhone 7 Plus should drive the penetration of multi-cams in smartphone, which should benefit Sunny Optical (2382 HK, HKD39.70, Outperform [2]), our other top pick in the sector, although it is not in Apple supply chain. The ramp-up shipments of iPhones should also provide near-term positive revenue momentum for the supply chain (see below table), in our view. Main risk to our positive sector rating: weaker-than-expected iPhone sell-through. iPhone: production volume by model (m units) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16E 3Q16E 4Q16E 2014 2015 2016E iPhone 4 & 4S 2.0 0.5 0.0 0.0 0.0 0.0 0.0 0.0 22.0 2.5 0.0 iPhone 5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 iPhone 5C 2.5 1.0 0.5 0.0 0.0 0.0 0.0 0.0 18.5 4.0 0.0 iPhone 5S/6SE 8.0 4.5 4.0 2.5 6.0 9.0 8.0 6.0 69.5 19.0 29.0 iPhone 6 & 6 Plus 45.5 47.0 19.5 13.5 7.5 5.5 3.5 0.0 80.0 125.5 16.5 iPhone 6S & 6S Plus 0.0 0.0 22.0 60.0 33.5 28.5 14.0 8.5 0.0 82.0 84.5 iPhone 7 series 0.0 0.0 0.0 0.0 0.0
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