PETALING JAYA: Electronics manufacturing services companies that are involved in the Apple supply chain continue to bleed as sentiment toward these stocks takes a dive.
This came after Apple Inc lowered its first-quarter guidance in a letter to investors from chief executive officer Tim Cook on Wednesday that also noted that sales were weak in China – the second-biggest economy in the world.
Apple shares declined some 7% in after-hours trading after the letter was made public in the United States.
A lowered guidance is a rare occurrence for the smartphone maker.
In Malaysia, companies which are heavily involved in the Apple supply chain fell following the developments in the United States.
Globetronics Technology Bhd settled at its intraday low of RM1.48, losing 24 sen or 13.95%, while Inari Amertron Bhd recovered slightly to RM1.27 away from its intraday low of RM1.24, declining 20 sen or 13.61% at the end of the trading day.
The lower guidance will affect local players in the supply chain, and other Asian suppliers that are based in Taiwan and China are also not spared by the selldown.
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook said in the letter to investors as reported by Reuters.
Cook reportedly told CNBC that Apple products have not been targeted by the Chinese government, although some consumers may have chosen not to buy iPhones and other Apple devices as the company is an American brand.
“The much larger issue is the slowing of the (Chinese) economy, and then the trade tension that has further pressured it,” Cook reportedly said.
The letter also notably mentioned that Malaysia, among other emerging markets including Mexico, Poland and Vietnam, had set a record for Apple.
The latest development in America implied that the worst might not be over for the two companies that are exposed to the Apple supply chain.
Their shares were battered in yesterday’s trading, with Globetronics at its nine-month low and Inari at an 18½-month low.
Analysts said investors had every right to be cautious and were holding off from recommending any bottom-fishing activities for the moment.
“I think the consensus out there is that Apple will reduce orders. It will probably ask its suppliers to cut orders and not send in so many in the first and second quarters of 2019.
“Fewer orders forecast by Apple would also be magnified in the supply chain due to the effect of inventories,” AllianceDBS Research’s technology analyst Toh Woo Kim told StarBiz.
“Let’s say there is a cut of less than 10% of orders at Apple’s level. For the suppliers, this effect would be magnified and there might be a 20% to 30% cut in orders based on conservative estimates,” he said.
Apple had initially anticipated its new-edition iPhones that were launched in 2018 to be a runaway success, with the company expecting success regardless of the phone’s pricing.
“But on hindsight, clearly this did not materialise. Pricing is one thing, then there is also the issue of slowing global growth and keen competition from Chinese smartphone makers. Margins would be impacted indirectly through the lower utilisation of the plants because they have fixed costs that would need to be covered, thus leading to lower margins,” Toh said.
In his report on Globetronics that was published on Dec 10, Toh noted that the first-half of the year was traditionally the low season for smartphone production.
He added that news flows and narratives from the supply chain were unlikely to turn positive in the near term.
“We think investors are ‘jaded’ after two years of misguided expectations on smartphone sales, and therefore, would require a lot more positive data points to be convinced about any recovery for the next product cycle,” he said.
AllianceDBS Research has lowered its target price to the earnings ratio to 14 times from 16 times, and derived a lower target price of RM2.10 for Globetronics with a “hold” rating.