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Capital Markets

Foxconn unit's $4bn IPO is war chest for 'Made in China 2025'

FII's listing would be biggest in mainland since 2015

Terry Gou reiterates Foxconn will be part of China's smart manufacturing push and the listing of FII is part of that strategy.   © Reuters

TAIPEI -- Foxconn Industrial Internet, a unit of Hon Hai Precision Industry, plans to raise 27.1 billion yuan ($4.3 billion) in an initial public offering in Shanghai to develop smart manufacturing solutions to meet expected demand from Beijing's "Made in China 2025" policy.

"The company will aggressively devote itself into the realization of 'Made in China 2025,' becoming the world's leading industrial, internet-focused smart manufacturing and technology solutions provider," FII Chairman Tim Chen said during an online investors' conference on Wednesday.

"Made in China 2025" was devised by Beijing in 2015 to transform the country from a manufacturing giant into a global, leading smart manufacturing powerhouse. The compound annual growth rate of industrial internet in China is estimated at 14.7% from 2015 to 2020, according to research consultancy International Data Corp.

Terry Gou, chairman of Hon Hai, better known as Foxconn Technology Group, had reiterated that Foxconn will be part of China's smart manufacturing push and the listing of FII is part of that strategy.

If successful, FII's Shanghai IPO will be the largest debut on the Chinese stock markets since 2015. Its shares are being offered at 13.77 yuan apiece, valuing the company at approximately $43 billion, approaching the level of its parent's market value of 1.45 trillion New Taiwan dollars ($48.46 billion) on the Taiwan Stock Exchange.

It is likely FII's market value will exceed that of its parent once it has floated. The price-to-earnings ratio of Foxconn's smart manufacturing unit stands at 17.09 times 2017 earnings of 0.8057 yuan per share, higher than its parent's 10.43 times in Taiwan. Foxconn shares shed 0.48% to close at NT$83.6 in Taipei.

"The IPO is just the beginning," Chen said. "We will leverage the capital injection from the stock market to grow the company to become stronger and bigger." 

Chen said the company plans to deploy IPO proceeds in research and development in a wide area, including high-speed optical fiber, fifth-generation connectivity technology, networking equipment, and cloud-computing platforms -- all of which are elements in developing industrial internet-focused solutions.

FII has about 60,000 industrial robots and advanced automated factories and owns massive production data that forms the foundation for the development of machine-to-machine communication, deep learning and artificial intelligence. It developed the so-called "BEACON" industrial internet platform, which could accelerate the upgrade from industrial automation to smart manufacturing for enterprises, Chen said.

The Foxconn unit makes communication networking equipment, cloud-computing equipment and precision instruments and industrial robots. Its key clients includes Apple, Amazon, Dell, Cisco, Dell, HP, Huawei Technologies, and Lenovo Group, which are all also important customers of its parent company.

FII is expected to record revenue of between 146.06 billion yuan and 154.58 billion in the first six months of this year, which translates into year-on-year growth of 6.8% to 13.1%. Its net profit over the same period is projected to grow between 0.6% and 4.5% to between 5.35 billion yuan to 5.56 billion yuan, according to the company's filing on Wednesday.

FII plans to float up to 1.97 billion domestic A-shares, or 10% of its capital, and Foxconn's stake in the unit is estimated to be cut from 94.223% to 85% after the listing. The IPO is part of Foxconn's efforts to raise more capital, improve financials and enter new areas such as artificial intelligence and robotics, while cutting reliance on its top customer Apple, which accounts for half of its revenue. The IPO is also timely as China has pledged to lure high-tech and innovative companies to list on the domestic stock exchanges.

"It's attractive for companies to seek an IPO in China because it offers a better price-to-earnings ratio, which would help companies to raise money more easily," said Hadrien Chiu, partner at accountancy PricewaterhouseCoopers Taiwan. "With the funding, they could expand operations or factories in China, gain more businesses from Chinese customers within the massive market, and attract more high-end talent with more competitive salary packages."

Chiu said his company has offered consultation to more entities about listing in China this year than in the past. However, the cost to file an IPO in China is still three to five times higher than in Taiwan, according to Chiu.

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