UPDATE 1-Taiwan's Hon Hai profit tops forecasts on iPhone demand

Wed May 14, 2014 8:15am EDT

* Q1 net profit T$19.54 bln vs T$18.18 bln analyst view

* Profit driven by strong Q1 iPhone sales

* IPhone orders likely to surge to 90 mln units-analyst (Adds analyst comments, context)

By Michael Gold

TAIPEI, May 14 (Reuters) - Hon Hai Precision Industry Co Ltd , the world's largest contract maker of electronic goods, booked its biggest-ever first-quarter profit thanks to exceptional demand from main client Apple Inc.

The Taiwanese manufacturer earns as much as 60 percent of revenue primarily assembling Apple products such as its iPhone 5S, analysts estimate, and in recent months has diversified into software and services as industry watchers point to a slowdown in the smartphone market.

But Apple defied such forecasts in March when iPhone shipments beat market estimates by 15 percent, pushing first-quarter revenue to a record high in a post-holiday period when consumer goods sales typically fall.

That demand helped Hon Hai book a 19.5 percent rise in first-quarter net profit to T$19.54 billion ($647.6 million), versus the T$18.18 billion mean estimate of 12 analysts polled by Thomson Reuters.

Shares of Hon Hai ended 0.3 percent higher ahead of the result, compared with a 0.7 percent gain in the broader TAIEX index. The stock has risen 9.7 percent since the start of the year versus the benchmark's 3.1 percent gain.

IPHONE DEPENDENCE

Hon Hai's reliance on Apple has been cited as both benefit and hindrance by commentators. Smartphones such as the iPhone command high prices but have already become widespread in advanced economies.

Researcher IDC projects worldwide smartphone sales to grow 19 percent this year from 39 percent last year, slowing to an average of 11.5 percent over 2014 to 2018. The quickest growth rates are in emerging markets, where low-end models dominate.

"Slowing sales could be a cap on Hon Hai's revenue in the future," said Yuanta Securities analyst Vincent Chen. "That's why you've had [company chairman] Terry Gou say it needs to look for other sources of growth."

In a departure from manufacturing, Hon Hai expects to begin operating a fourth-generation (4G) mobile telecommunications network this year and has hired thousands of software engineers to work on cloud computing initiatives.

But reliance on Apple is still likely to be a boon, with the release of a new-model iPhone later this year. Citi analyst Wei Chen expects Apple to order 90 million handsets from Hon Hai in 2014, nearly double the orders for the iPhone 5S.

The next iPhone is likely to have a larger screen than its predecessors. This could unlock a substantial consumer base put-off by the current models' small screens compared with rival offerings from Samsung Electronics Co Ltd, Chen wrote in a recent report.

"We believe the iPhone 6 could be the biggest product cycle that Hon Hai has yet seen," Chen wrote. ($1 = 30.1710 Taiwan Dollars) (Editing by William Hardy and David Holmes)