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Foxconn and the Shanghai IPO

Feb 24, 2018 by The Passage Team
Foxconn and the Shanghai IPO

When Foxconn announced plans for its Shanghai IPO, the market cheered. But will we still be laughing in the long run?

It’s been a chilly February for the mainland equity market. On February 9, the coldest day of the year so far in terms of stock performance, when the standard-bearing Shanghai Composite Index closed at 3,129.85 points, down 4.05 percent, Apple contractor Foxconn stepped up and offered some compensatory warmth.

The Taiwan-based company, formally known as Hon Hai Precision Industry Co, announced plans to float a subsidiary unit, Foxconn Industrial Internet Co, on the Shanghai Stock Exchange, in a prospectus made public on the China Securities Regulatory Commission website.

Foxconn Industrial is seeking to use its Shanghai listing to bankroll eight new technology projects that add up to 27.25bn yuan ($4.31bn), as per the company’s prospectus.

The company has chosen China International Capital Corp, the nation’s oldest investment bank, to underwrite its Shanghai IPO. Many details related to the IPO – such as the offer price, issue date and the number of new shares to be listed – remain unknown. But most forecasts anticipate that the Foxconn unit is well-poised to become the most valuable technology firm on the A-share market.

The mainland IPO plan, which Foxconn President Terry Gou revealed as early as June 2015, is considered a significant part of the world’s largest electronics contractor’s shift away from original equipment manufacturing. Foxconn intends to develop its own brand and offer higher value-added activities so as to fatten profit margins. Besides, Foxconn is already a household name, but it’s A-share flotation is expected to add glamour to the mainland market.

Will the giant transform?

However promising it might seem, neither of the dual goals could be easily achieved.

The eight technology projects that will be funded by the Shanghai IPO come in a broad range. These projects include industrial internet platforms, cloud computing and high performance computing platforms, 5G and internet of things solutions and smart manufacturing technologies. Put together, these projects betray great ambition. Hence many believe the Foxconn unit comes to the mainland stock market seeking a substantial makeover. Numbers presented in the company’s prospectus, however, fail to sufficiently corroborate Foxconn’s intention to remake itself as a high-tech icon.

Foxconn apparently opts for a gradual path to reinvention, with three out of the eight new projects relating to smart manufacturing technologies and facilities. Together, these three projects account for more than 60 percent of all spending.

In addition, with an employee strength of nearly 270,000, Foxconn has remained primarily labor-intensive and is yet to convince market watchers of its tech capabilities. The company’s production and manufacturing headcounts represent 75.57% of its entire staff, while research and development plus engineering employees account for a mere 14.9%. Also, its research and development spending is only a small fraction of its enormous revenues. The ratio stood at 2.24% in 2017, a slight increase from 2.01% in 2016 and 1.75 percent in 2015. This is barely on par with high-tech companies that invest heavily in research and development.

Observers say the new facilities and technologies will essentially help Foxconn’s manufacturing arms to run on the latest and smartest technologies. This can lead to operational excellence, which FoxConn is already known for, and not cutting-edge technology development, which is the stated goal of the IPO. Thus, Foxconn’s brand is unlikely to be boosted much by the Shanghai IPO.

In fairness, Foxconn has in recent years upped its brand value through the acquisition route. It acquired Japan-based Sharp in 2016 and completed the purchase of Nokia’s feature phone business in partnership with Nokia brand licensee HMD Global in the same year.

In a fresh sign of Foxconn’s own brand push, India’s Economic Times reported at the beginning of the year that Foxconn’s phone brand InFocus is slated to foray into India’s emerging 4G feature phone market.

But such attempts barely make a big splash, especially considering that traditional tech brands, including Foxconn’s fellow townsman HTC, have already shifted focus to artificial intelligence in an attempt to reinvent their businesses.

The market’s savior?

Foxconn Industrial’s planned flotation in Shanghai injects optimism into the weak stock market. It can also be seen as a test of the risk-hedging capabilities of the mainland market.

Foxconn Industrial had 354.5 billion yuan in sales in 2017, an increase of 30 percent from the previous year’s 272.7 billion, according to the company prospectus. Its net profits rose to 15.87 billion yuan in 2017, up from 14.37 billion in 2016.

Although IPO details are yet to be disclosed, industry insiders widely expect the IPO to get done in six months and the company is forecast to unseat Hangzhou Hikvision Digital Technology – which has a market capitalization of more than 360 billion yuan – as the most valuable tech stock in the mainland market.

Fueled by news of the IPO, A-share companies linked to Foxconn, notably Henan Ancai Hi-tech Co, are defying an overall downturn over recent days. This is perhaps an indication the electronics manufacturing leviathan is welcomed by A-share investors.

Nevertheless, this might just give investors an opportunity to reap short-term stock gains as is often the case. The mainland market is still dominated by individual investors and stocks sometimes go north on pure hype.

There are also concerns that the market, which is hardly immune to global turbulences, might not be strong enough to welcome Foxconn onboard.

Out of more than 3,000 stocks traded on the A-share market, hundreds have shed 20-30 percent over the past two weeks. These woes are compounded by the fact that the upswings in newly-listed stocks seem to have come to a halt.

For instance, Hebei Yangyuan Zhihui Beverage, which debuted on the Shanghai bourse on February 12, became the worst-performing new stock on the A-share market, plunging 10%, the daily limit, on two successive days before diving an additional 5.76% on the third day, which happened to be the last trading day in the Year of the Rooster.

The bearish market sentiment is anything but a boon for Foxconn Industrial whose giant IPO could further dampen the market in the long run. This fear gets augmented when we consider that Foxconn has outstanding debt totaling 120.4 billion yuan, roughly 81% of its total assets, and it has a net profit margin of less than 5%.

As Chinese transition into the lunar new year of the Dog, the market might echo a traditional concern: roosters and dogs are not left in peace!

To assuage rational and irrational fears, Foxconn Industrial needs to navigate confidently and effectively through this potential tricky situation.

Shinchan Ri works with a Beijing-based newspaper, writing in English about the fast-evolving technology world. She can be reached atshinchanri@gmail.com

The Passage Team

The Passage is committed to creating in-depth content over technology industry across Asia with a focus on emerging startups in the technology, healthcare, education, food, tech, travel & mobility segments.

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