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A New Apple Shock? SMBC Nikko Warns Of Another iPhone Production Cut

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A New Apple Shock? SMBC Nikko Warns Of Another iPhone Production Cut

SMBC Nikko warned that iPhone production to weaken further and the demand for iPhone 7 will be weak, triggering speculations about a new negative trend for Apple Inc. (NASDAQ: AAPL) shares.

Apple shares have dropped 25 percent in the past year.

Shock Continues

The brokerage said: "The Apple shock is continuing. Based on our visit (to Apple suppliers in Taiwan), we think there are excess iPhone inventories and see potential for a second round of production cutbacks, which is a negative surprise."

In light of current conditions, SMBC also cut their 2016 iPhone demand assumption units to 190 million from 220 million.

"We believe the current market consensus is flat/down slightlyYoY, but we see a strong likelihood that this consensus will shift down below the 200mn unit mark in response to negative news flow from the supply chain," SMBC wrote in a note to clients.

"We believe inventories of current iPhone models stand at 50-60mn units. These inventories are unlikely to be used up even with sharp cutbacks to production in Jan-Mar (roughly halved YoY and QoQ to 30mn units), so we expect Apple to commence a second round of production cutbacks," SMBC added.

Weak Demand

Weak demand for current models is behind the inventory glut, and it appears that the sales trend in China, which has been a major driver of iPhone demand, is shifting. While some aspects of the design for the iPhone 7 remain in flux, SMBC thinks the attraction of the new model will be weak, as no major spec changes seem planned at present.

While dual-lens cameras are generating interest, the analysts at SMBC think they will only be adopted on one 5.5-inch model, not across the range. In addition, it is possible that the number of lenses will be increased from five to six, slightly increasing the thickness of the lens module. Elsewhere, the LCD panel and driver IC is expected to be the same as the current models.

"Regarding the 4-inch iPhone that is rumored to be going on sale in March, some component makers have been making components since December 2015, but volumes are small. While some component makers are seeing orders for around 10mn units on an annual basis, there are no quarterly order plans, highlighting Apple's caution," SMBC noted.

Latest Ratings for AAPL

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Apr 2021BarclaysMaintainsEqual-Weight
Apr 2021Monness, Crespi, HardtMaintainsBuy
Apr 2021Credit SuisseMaintainsNeutral

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