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Telecommunications equipment industry

Foxconn's Narrow Customer Base Poses Threat to Firm Amid IPO Plans

Strategic Insights

— 2 min read

Foxconn International Holdings, a Taiwan-listed mobile-phone manufacturer, is poised for robust earnings growth through its outsourced manufacturing business, but its dependency on two key customers, Nokia and Motorola, could be a major obstacle. The company's combined sales to these two giants reached US$1.86 billion in the first three quarters of last year, accounting for 89% of its turnover. Foxconn plans to expand its customer base, but experts remain skeptical, noting that the highly competitive sector makes it challenging to achieve.

Key Takeaways:

  • Foxconn's sales to Nokia and Motorola accounted for 89% of its turnover in the first three quarters of last year, totaling US$1.86 billion.
  • The company's cash flow and profitability would be severely affected if its key customers suspended purchases or delayed payments.
  • Foxconn's share price is highly correlated with those of Nokia and Motorola, making it vulnerable to profit warnings or price collapses.
  • The company aims to expand its customer base, but experts doubt the ease and timeline of achieving this goal.
  • Foxconn's valuation seems fair, but investors must believe in the global outsourcing trend.
  • Assuming a 25% growth in earnings this year, Foxconn's valuation would be in the range of 12 to 15 times earnings.
  • Goldman Sachs projects Foxconn's net earnings to rise 27% to US$227.5 million this year, while UBS forecasts a 39% increase to US$249 million.

Statistics:

  • Foxconn's sales to Nokia and Motorola accounted for 89% of its turnover in the first three quarters of last year, totaling US$1.86 billion.
  • Foxconn's cash flow and profitability would be adversely affected if its key customers suspended purchases or delayed payments.
  • Foxconn is offering 869.4 million shares at $3.06 to $3.88 each to finance expansion of its existing production facilities and to repay bank borrowings.
  • The offering price represents a price-earnings ratio of 15 to 19.1 times last year's estimated earnings of $1.39 billion.
  • Foxconn's net earnings are projected to rise 27% to US$227.5 million this year (Goldman Sachs forecast).
  • Foxconn's net earnings are forecast to rise 39% to US$249 million this year (UBS forecast).

Sources:

  • "Foxconn's Narrow Customer Base Poses Threat to Firm Amid IPO Plans" - The Wall Street Journal (source not specified in the original text, however the company Foxconn mentioned in the article Foxconn International Holdings).
  • Preliminary listing prospectus (exact date not specified, likely 2003).
  • Goldman Sachs report (exact date not specified).
  • UBS forecast (exact date not specified).

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