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June 23, 2017

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Apple's expanding product lines to benefit Hon Hai, Largan

TAIPEI -- The anticipated launch of bigger smartphones and tablets by Apple Inc. in late 2014 should benefit its Taiwanese suppliers Hon Hai Precision Industry Co. and Largan Precision Co., according to an analysis by Bank of America Merrill Lynch.

The bank said that Apple remains the most important customer for Taiwan's technology firms, while the American electronics giant's potential plan to make bigger iPhones and iPads will strengthen its product portfolio, leading to increasing average selling prices and component value for its supply-chain firms.

"In our view, Hon Hai and Largan will be the largest beneficiaries because of their competitive strength and expanding lead they have over their peers," Merrill Lynch analyst Robert Cheng wrote in a recent note to clients.

Despite some market speculation that Apple is adding new assemblers to its roster, Cheng said he believes Hon Hai, a major assembler for Apple since 2007, is far ahead of its competitors in terms of capacity, component manufacturing ability, production yield and global logistics service.

Also, Hon Hai's operating margin is improving and its capital expenditure is declining because the company's early investment in the Chinese hinterland is paying dividends, he added.

"We expect Hon Hai's sales momentum to resume in 2014 and its margin expansion to continue," Cheng said, rating "buy" on Hon Hai shares with a price target of NT$101 (US$3.35).

Moreover, the analyst forecast that Largan, which supplies camera lenses to Apple, will continue to gain from an industry upgrade in smartphone camera features.

With its leading technology and production yield in the industry, Largan is also winning more orders from non-Apple customers, especially in China, Cheng said. He rated "buy" on the stock with a price target of NT$1,440.

The growing use of mobile phones for different purposes, such as viewing images and videos, accessing the internet and gaming with other people, has resulted in a need for devices with larger display sizes and superior quality.

Market researchers have predicted that Apple will need to launch a larger iPhone to compete against large-screen models from handset makers using Google Inc.'s Android platform, including the increasingly popular phone-tablet devices.

A phablet is defined by Transparency Market Research, a global market intelligence company, as a handset that has a screen of between 5 and 7 inches and features a 1-gigahertz or faster processor.

Around 21 million Android-based phablet devices were sold globally in 2012, and the numbers are expected to exceed 150 million units by 2018, the research firm said.

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