(Bloomberg) -- A key supplier to Apple Inc. and a dozen other tech giants plans to split its supply chain between the Chinese market and the U.S., declaring that China’s time as factory to the world is finished because of the trade war.Hon Hai Precision Industry Co. Chairman Young Liu said it’s gradually adding more capacity outside of China, the main base of production for gadgets from iPhones to Dell desktops and Nintendo Switches. The proportion outside the country is now at 30%, up from 25% last June.That ratio will rise as the company -- known also as Foxconn -- moves more manufacturing to Southeast Asia and other regions to avoid escalating tariffs on Chinese-made goods headed to U.S. markets, Liu told reporters after his company reported financial results.“No matter if it’s India, Southeast Asia or the Americas, there will be a manufacturing ecosystem in each,” Liu said, adding that while China will still play a key role in Foxconn’s manufacturing empire, the country’s “days as the world’s factory are done.”Intensifying trade tensions between Washington and Beijing have pushed device manufacturers to diversify their production bases away from China, and Liu last year said that Apple’s most prized product, the iPhone, can be made outside China if needed. The two nations remain in trade talks, but Liu’s comments affirm a growing expectation that the China-centric electronics supply chain will fragment over the longer term.Read more: Trump Tumult Has Gadget Giants Splitting Along U.S.-China LinesThe Taiwanese company reported better-than-expected net income of NT$22.9 billion ($778 million) for the quarter ended in June, boosted by increased demand for iPads and MacBooks. Revenue was NT$1.13 trillion, but Hon Hai warned it expects its third-quarter sales will be down by double digits relative to 2019 as Apple delays its iPhone launch this year.Hon Hai is bouncing back from a record profit slump in the first quarter as production at its factories recovered and shelter-in-place orders spurred demand for home computing equipment. The pandemic likely boosted iPad and Mac sales, even as Apple store closures weighed on iPhone sales, Apple CEO Tim Cook said on July 31 after reporting quarterly revenue that crushed estimates. Apple accounts for half of Hon Hai’s sales.Read More: Apple Smashes Revenue, IPhone Estimates on Pandemic DemandEven as Apple outperformed, Hon Hai’s other customers have fared less well. Hong Kong-listed subsidiary FIH Mobile Ltd. said in its Aug. 7 earnings release that while Huawei Technologies Co.’s new phones have been popular in China, they missed expectations elsewhere following U.S. sanctions. Another key customer Xiaomi Corp. suffered a backlash in the Indian market amid growing tensions between China and the South Asian country. FIH lost $100 million in the first half.Foxconn has been shaking up its traditionally China-focused operations. Hon Hai is among Apple assembly partners that plan to expand operations in India, potentially helping the iPhone maker grow its presence in the country of 1.3 billion and shift some of the U.S. company’s supply chain outside of China as ties between Washington and Beijing fray.Chinese rivals are also posing a growing challenge. Local electronics titan Luxshare Precision Industry Co. is poised to become the first Chinese homegrown iPhone assembler after sealing a deal in July to buy an Apple handset production plant from Wistron Corp. While Hon Hai will keep assembly orders for premium iPhones, Luxshare will eat into the business for mid-to-entry-level Apple handsets, Fubon Securities analyst Arthur Liao wrote in a July 23 note.Foxconn will work on its component business to maintain tech leadership and it also benefits from its long-term relationship with Apple, Liu said in response to several analysts’ questions about Foxconn’s competitive strategy against the rising Chinese supplier.Orders could be further affected after President Donald Trump issued an executive order barring U.S. residents from doing business with Tencent Holdings Ltd.’s WeChat. Annual iPhone shipments could plunge 25%-30% if Apple is forced to remove the app from its app stores worldwide, TF International Securities analyst Kuo Ming-chi warned in an August 9 note.(Updates with comments from chairman from first paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Tencent Holdings Ltd. boosted revenue at the fastest pace in two years, defying an economic downturn in China as it prepares to face a ban on its WeChat messaging app by U.S. President Donald Trump.Sales rose 29% to 114.9 billion yuan ($16.5 billion) in the three months ended June, beating estimates with a surge in online gaming revenue. It reported net income of 33.1 billion yuan that beat the highest of analysts’ projections, thanks to a gain of more than 8.6 billion yuan from asset disposals and valuation gains in its portfolio of investments. Shares in Prosus NV, which holds the internet assets of major shareholder Naspers Ltd., gained about 3% in Amsterdam.China’s biggest social media company has benefited from an internet resurgence during Covid-19, though it still faces a U.S. ban on its WeChat service with potentially far-ranging impact. While Tencent didn’t address that sanction in its earnings outlook, executives will seek to reassure analysts on a call later it can withstand a White House campaign that’s already ensnared Huawei Technologies Co. and dozens of Chinese up-and-comers.What Bloomberg Intelligence SaysTencent’s 2Q earnings beat was driven by heady performances across all business lines, including online games, social advertising and fintech, delivering a dose of reassurance to investors as a U.S. ban looms for WeChat.\- Vey-Sern Ling and Tiffany Tam, analystsClick here for the research.Tencent is focusing on its core home market amid growing foreign hostility. It won approval from Beijing to earn money from Call of Duty Mobile, the smartphone version of a long-running franchise that will underpin its gaming business, and has charted a line-up of new titles for 2020 to shore up resilient franchises Peacekeeper Elite and Honor of Kings. New titles like Brawl Stars drove a 40% surge in online gaming revenue during the quarter -- its biggest increase since 2017. It’s also driving discussions to merge U.S.-listed Huya Inc. and DouYu International Holdings Ltd. to create a Twitch-like $10 billion local leader in games streaming. Tencent has already folded Huya’s results into its own, swelling both its top and bottom line.One risk to its outlook was the surprise delay of Mobile Dungeon&Fighter, though analysts expect eventual approval for a Nexon Co. title that’s supposed to be Tencent’s tent-pole for the second half.”Although the direct revenue impact is small, Mobile DnF’s delay and the WeChat ban in the U.S. cast a shadow over the near term outlook,” Bernstein analyst David Dai said.Read more: Trump’s Assault on WeChat Endangers a $280 Billion Tencent RallyChina’s No. 2 company had gone on a tear, gaining more than $280 billion of market capitalization since a March trough, before U.S. President Donald Trump signed an executive order labeling WeChat a national security risk. It’s unclear how the White House will define that ban, but the sweeping language of the order -- which would bar “transactions” with the Chinese company from September -- leaves the door open for the administration to extend it well beyond WeChat.The messaging service grew monthly active users 6.5% to more than 1.2 billion as of June’s end. Started in 2011 as a WhatsApp clone, the service has become deeply ingrained in Chinese life, indispensable to the hordes who use it to chat, shop, watch videos, play games, flirt, order food and taxis. It pioneered the all-in-one or super-app concept by embedding lite apps or mini programs -- a model emulated by Alibaba Group Holding Ltd. as well as Facebook Inc. Its success sprang in part from the fact that China banned global services such as WhatsApp, Twitter and Instagram, allowing WeChat and a host of other Chinese equivalents to flourish in an alternate internet realm.At a minimum, Trump’s order likely gets WeChat removed from Apple and Google’s mobile stores, which in turn means suspending updates or even blacking out a service vital to communications on the factory floor, in households and the boardroom. And if American consumer giants like Starbucks Corp. and Walmart Inc. are prevented from doing business with WeChat in China, Tencent may also take a blow to advertising and e-commerce sales.“Uncertainties still exist for Tencent and other Chinese internet companies with business in the U.S., and Chinese pure-plays will be perceived as safer by investors,” Dai wrote before earnings were released.Read more: Why Tencent and WeChat Are Such a Big Deal in China: QuickTake(Updates with analyst’s comment from the fourth paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Donald Trump’s WeChat ban targets a celebrated Chinese innovation at the heart of the world’s largest mobile gaming and social media empire, threatening one of the more eye-catching stock rallies of 2020.It’s hard to overstate WeChat’s importance to Tencent Holdings Ltd. It’s the means through which Tencent introduces a billion people to games and other online content, funneling trillions of dollars in annual payments to brands from Apple Inc. to Walmart Inc. WeChat’s reach underpinned Tencent’s $280 billion gain in market value since a March 18 Covid-19 trough -- equivalent to one Samsung Electronics Co. and the fifth biggest dollar-gain on the planet over that period.Trump single-handedly stopped that rally cold. The U.S. President signed an executive order last week to ban U.S. entities from dealing with WeChat -- along with TikTok, ByteDance Ltd.’s viral video platform -- in 45 days. Confusion and uncertainty reigned as investors grappled with the vague edict. Tencent shed $66 billion over two days before it partly bounced back.Executives unfurling earnings Wednesday will seek to reassure the market it can withstand a White House campaign that’s already ensnared Huawei Technologies Co. and dozens of Chinese up-and-comers. A U.S. official clarified the sanction involves only the app and not its owner. But the sweeping language of Trump’s order -- which bars “transactions” with the Chinese company -- leaves the door open for the administration to extend it well beyond WeChat, dubbed Weixin locally.“It’s really a gut punch to those companies when you look at their global expansion plans,” Wedbush analyst Daniel Ives told Bloomberg Television. Tencent’s stock stood largely unchanged ahead of the results this afternoon.Why Tencent and WeChat Are Such a Big Deal in China: QuickTakeThe WeChat operator is doing well in the short run: analysts on average foresee a 27% rise in June-quarter revenue and a 13% spike in net income. But investors appear divided over the fate of China’s second largest corporation. Options on the company -- contracts that let the holder buy or sell stock at a pre-agreed price -- suggest traders are bracing for a 5.7% swing in Tencent’s shares after it unveils earnings, or roughly four times the usual band.The three most popular options as of Wednesday included a bullish contract that projected a roughly 16% rise to HK$600 by September’s end and a bearish one that suggested a 20% plunge, Bloomberg data showed. But the put-to-call ratio, or the number of traded sell options divided by the number of buy contracts, is near its lowest since May, suggesting more upbeat than bearish investors still.The widening gulf reflects the central role WeChat plays in Tencent’s empire, and the outsized fallout now that it’s in Trump’s cross-hairs. Started in 2011 as a WhatsApp clone, the service has become deeply ingrained in Chinese life, indispensable to the hordes who use it to chat, shop, watch videos, play games, flirt, order food and taxis. It pioneered the all-in-one or super-app concept by embedding lite apps or mini programs -- a model emulated by Alibaba Group Holding Ltd. as well as Facebook Inc. Its success sprang in part from the fact that China banned global services such as WhatsApp, Twitter and Instagram, allowing WeChat and a host of other Chinese equivalents to flourish in an alternate internet realm.Today, if the Chinese company is a mashup of Facebook, Netflix, WhatsApp and Spotify, then WeChat is the smartphone and payments backbone that ties them all together.“The impact on valuation would be more severe if the implementation included banning all transactions of Chinese businesses of U.S. companies with Tencent as a whole, as this would also hurt Weixin, advertising in mainland China by U.S. affiliated firms, the international cloud business, the international gaming business, and so on,” Morningstar analyst Chelsey Tam wrote this week.At a minimum, Trump’s order likely gets WeChat removed from Apple and Google’s mobile stores, which in turn means suspending updates or even blacking out a service vital to communications on the factory floor, in households and the boardroom. And if American consumer giants like Starbucks Corp. and Walmart are prevented from doing business with WeChat in China, Tencent may also take a blow to advertising and e-commerce sales.But the ban has wider implications. Even if the executive order doesn’t cover WeChat China, it could hamstring Tencent in other ways. Take Tencent’s $15 billion cloud services and fintech division, a major driver of growth over past years. If American firms can’t sell servers to support WeChat, that effectively means they can’t sell to Tencent itself unless the messaging service can be completely ring-fenced. Secretary of State Michael Pompeo has already urged American companies to cut ties with Chinese cloud providers including Tencent and Alibaba, part of a “clean internet” campaign.Read more: Trump Ban on Top Messaging App Risks Snarling Global BusinessThen there’s Tencent’s cash cow. Gamers the world over were among the fastest and loudest opponents of the action, going online to campaign to save titles like PUBG Mobile and Call of Duty Mobile. Tencent has some $22 billion of investments in U.S. gaming assets and companies from Activision Blizzard Inc. to Fortnite maker Epic Games Inc. and League of Legends developer Riot Games Inc.What Bloomberg Intelligence SaysThe spilling over of U.S.-China tension into the software realm, marked by President Donald Trump’s executive orders against Tencent and ByteDance, could increase risks for global video-game makers if business operations are forced to decouple. Tencent has at least $22 billion of gaming investments in the U.S. that, if bans widen, may face forced divestment similar to ByteDance’s TikTok, while Activision Blizzard risks losing 10-20% of Blizzard revenue generated in China through its partnership with NetEase.\- Vey-Sern Ling and Matthew Kanterman, analystsClick here for the research.Tencent in recent years has searched for ways to extend its dominance of China’s social media and gaming scenes internationally, with mixed success. Its smaller global exposure now becomes an edge over upstart ByteDance, whose TikTok is the first truly successful Chinese-made internet service.Now it’s turning inward faster than before. On Monday, Tencent kicked off a deal to merge game-streaming platforms DouYu International Holdings Ltd. and Huya Inc. into a $10 billion local leader. Last month, it offered to buy out and take private domestic search engine Sogou Inc.But Beijing’s own moves could complicate the matter. China has threatened to retaliate against what it perceives as rising U.S. aggression, but any attempt to undercut American operations in China could hurt Tencent and potentially complicate matters for non-U.S. players.“Uncertainties still exist for Tencent and other Chinese internet companies with business in the U.S., and Chinese pure-plays will be perceived as safer by investors,” Bernstein analysts including David Dai wrote in a report.(Updates with Tencent’s shares from the fifth paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.