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Foxconn posted record profit through cost control despite first-ever sales decline

Key Apple assembler is set for a strong year ahead with launch of new iPhone

TAIPEI -- Key iPhone assembler Hon Hai Precision Industry, also known as Foxconn Technology Group, posted record net profit for the 2016 full year through tighter cost controls, despite suffering a year-on-year decline in revenue for the first time that was largely due to slowing demand for Apple's popular handsets.

For the full year, net profit reached 148.66 billion New Taiwan dollars ($4.9 billion), an increase of 1.2% on the year, while revenue dropped 2.8% to NT$4.35 trillion.

The Apple supplier also posted record net profit for the October-December quarter at NT$68.76 billion, a jump of 29.9% on the year, despite revenue falling 1.8% to NT$1.4 trillion from the year-ago period.

Apple, Foxconn's No.1 client, also reported record profit in the same period.

The Taiwanese company attributed the improvement in probability to its automation efforts, tight cost controls and the contribution from the earnings of Japanese conglomerate Sharp. Foxconn, which bought the Japanese company last year, began recognizing Sharp's earnings in the third quarter in 2016. Under Foxconn's ownership, Sharp has posted its first profit in several years.

Vincent Chen, head of regional research at Yuanta Investment Consulting, said Foxconn's net profit for the last quarter of 2016 was nearly 41% better than the market consensus. The company's operating margin of 5.5% for the period was also the highest in a decade, since the second quarter of 2007.

"The most important reason for Foxconn to post record net profit in the October-December period was because it fully mastered the whole production processes of iPhone 7 and could deliver great yield in manufacturing," said Chen. The yield rate measures the number of satisfactory units in the production of a batch of components.

Chen added that Foxconn's efforts in making more components for Apple, rather than only doing low-cost assembly work, and the control of expenses also boosted the company's earnings.

Analysts are expecting a huge year ahead for iPhone suppliers with the launch of the 10th anniversary edition of the popular Apple device.

Chen said Yuanta Investment Consulting was very positive on Foxconn's financial performance for 2017 as the key Apple supplier will benefit from improved iPhone sales this year and Sharp's improving earnings.

For all of 2017 and 2018, iPhone shipments are likely to be driven by a "super cycle" related to the 10th anniversary of the device and will grow to 233 million and 252 million respectively, up from 211 million in 2016, according to Yuanta Investment Consulting.

Market watchers expect the premium handset, which will feature a slightly curved screen and will be exclusively assembled by Foxconn, to enjoy wide popularity with consumers.

Sean Kao, an analyst at research company IDC, estimates that suppliers are now preparing components for up to 150 million new iPhone 8 handsets in the second half of 2017, with two-thirds of these for the premium model.

Hon Hai shares in Taipei have gained about 8% since the beginning of this year, and closed at NT$91 on Friday before the announcement of the latest results.

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