Introduction: In 2023, with the continued popularity of ChatGPT, large language models and generative AI have attracted widespread attention, and AI applications have emerged like mushrooms after rain. Domestic AI industry chain companies have performed well in both financial performance and the stock market, thanks to the rise of AI. Among them, Foxconn Industrial Internet (601138.SH) is a highly representative company. It is a world-leading high-end intelligent manufacturer and a provider of integrated technology service solutions, and it is also an irreplaceable important part of the global AI industry chain.
Foxconn Industrial Internet was established in 2015, with its headquarters located on the second floor of Building C1, Foxconn Technology Park, No. 2 Donghuan Second Road, Longhua Street, Longhua District, Shenzhen, Guangdong Province. It went public on the main board of the Shanghai Stock Exchange in June 2018, with the stock code 601138. As of the end of 2023, the controlling shareholder of the company is China Galaxy Enterprise Limited, holding a total of 61.69% of the shares directly and indirectly, and the ultimate controlling party is Foxconn Precision Industry, but the company does not have an actual controller.
The main business of Foxconn Industrial Internet includes communication network and mobile network equipment, cloud computing, and industrial internet; the main products include network equipment, telecommunications equipment, high-precision components for communication network equipment, servers, storage devices, high-precision components for cloud service devices, precision tools, industrial robots, etc.
According to the 2023 annual report data of Foxconn Industrial Internet: revenue from communication and mobile network equipment was 278.976 billion yuan, accounting for 58.57% of the total revenue; revenue from cloud computing was 194.308 billion yuan, accounting for 40.79% of the total revenue; revenue from industrial internet was 1.646 billion yuan, accounting for 0.35% of the total revenue; revenue from other businesses was 1.41 billion yuan, accounting for 0.30% of the total revenue.
I. AI is at the forefront of the industry, and the company firmly grasps this golden opportunity; through years of horizontal and vertical layout, it has improved its own technical strength and supply chain capabilities, and finally became an "all-round" international enterprise in the field of electronic product design and manufacturing.
Foxconn Industrial Internet's business involves multiple industries such as AI, consumer electronics, and industrial internet, and the development status of these industries has a huge driving effect on Foxconn Industrial Internet's business.
At present, the rapid development of the digital economy is providing good development conditions and technical environment for the artificial intelligence industry. Artificial intelligence, as a key new technological capability, is also being regarded as an important engine to promote the development of the digital economy. According to the "14th Five-Year Plan" for Digital Economy Development in 2024, by 2025, the added value of the core industries of the digital economy, including AI algorithms and computing power, will reach 13.8 trillion yuan. As an important driving force for the new round of technological revolution and industrial transformation, artificial intelligence will also become an important means to shape new advantages in the development of the digital economy.
Since the outbreak of generative AI in 2023, the iteration of large model products has been in full swing, and "AI+" innovative applications have been continuously implemented. The product applications have been implemented in various industries such as medical, transportation, office, and financial payment, and have driven the continuous growth of computing power demand. Against the backdrop of the continuous increase in AI technology penetration rate, various manufacturers have continuously increased capital expenditures to build AI computing power and enterprise generative AI model landing, making the demand for AI training and inference servers continue to grow, and high-speed switches have also ushered in rapid growth opportunities. According to Trendforce research report, in 2024, the demand for AI servers from large cloud service providers and brand customers will not stop, and it is expected that the annual shipment of AI servers in 2024 will reach 1.67 million units, with a year-on-year growth rate of 41.5%. Research by Dell'Oro and IDC shows that with the construction and upgrading boom of AI data centers, the network switch market will usher in vigorous development. It is expected that from 2023 to 2026, the compound annual growth rate of revenue for AI data center network switches will reach 55%. At the same time, the explosion of AI computing power demand will also promote the acceleration of data center switches to 800G.
With the accelerated development of artificial intelligence large models, smartphones are also embracing this new opportunity. According to IDC data, in 2024, the global shipment of the new generation of AI mobile phones will reach 170 million units, accounting for 15% of the overall smartphone shipment.
According to the "White Paper on the Economic Development of China's Industrial Internet Industry (2023)" released by the China Industrial Internet Research Institute, in 2023, the added value contribution scale of China's industrial internet industry reached 4.69 trillion yuan, and the added value scale driven by the industrial internet for the primary, secondary, and tertiary industries will reach 0.06 trillion yuan, 2.29 trillion yuan, and 2.34 trillion yuan, respectively. The "comprehensive + characteristic + professional" industrial internet platform system continues to improve, and the industrial internet platform further empowers equipment, enterprises, and equipment, promoting industrial upgrading.As a global leader in high-end intelligent manufacturing and an integrator of technology service solutions, Foxconn Industrial Internet is an "all-round" presence in both research and development and manufacturing production. Its main business operations and customer base are as follows:
Let's take a look at Foxconn Industrial Internet's performance over the years, categorized by business segments:
Communication and Mobile Network Equipment Business: The products mainly include high-speed switches and router terminal precision components, as well as communication equipment. The main customers for high-speed switches and routers are Cisco, HPE, Huawei, etc., with Foxconn Industrial Internet's market share exceeding 75% in 2023. Terminal precision components mainly refer to high-precision mechanisms for smartphones, with customers primarily being smartphone manufacturers like Apple. Communication equipment includes base stations, optical transmission equipment, etc., with customers including Huawei, Cisco, Apple, Amazon, etc. From 2015 to 2023, revenue from communication and mobile network equipment increased by 80% from 155.125 billion yuan to 278.976 billion yuan, with a CAGR of 8%, with relatively larger increases in 2027, 2018, and 2022. The communication and mobile network equipment business is the first in terms of revenue and gross profit margin for Foxconn Industrial Internet, with revenue accounting for more than 50% and gross profit margin for more than 70%. Although the scale of this business is large, the gross profit margin is not high, and it slightly increased in 2023 compared to 2022.
Cloud Computing Business: The products mainly include AI servers, data centers, storage devices, and high-precision components for cloud service devices. Overseas customers include NVIDIA, Amazon, Dell, Microsoft, Oracle, etc., and domestic customers include JD.com, Alibaba, Tencent, ByteDance, China Mobile, etc. From 2015 to 2023, revenue from cloud computing increased by 1.04 times from 95.402 billion yuan to 194.308 billion yuan, with a CAGR of 9%, and the company achieved commendable growth in revenue in 2017, 2018, and 2022. The overall trend of revenue and gross profit margin is increasing, and although the gross profit margin is not as high as that of communication and mobile network equipment, it broke through the 4% mark for the first time in 2023, reaching a level of 5%.
Industrial Internet Business: It includes three major services: excellent manufacturing consulting and lighthouse factory solution business, one-stop digital manufacturing operation business, and cloud and platform service business. It can provide professional scene applications, digital manufacturing management, dual-carbon strategy services, intelligent hardware equipment, digital talent organization training, and other full-scene digital transformation services for large enterprises, small and medium-sized enterprises, parks, and industrial clusters of different types. From 2015 to 2023, revenue from the industrial internet increased by 76% from 934 million yuan to 1.646 billion yuan, with a CAGR of 7%. The revenue of this type of business is not very stable, and the revenue proportion is relatively small, but it is the business with the highest gross profit margin for Foxconn Industrial Internet. Although it accounts for a small proportion in the current huge revenue scale, its importance cannot be ignored due to its high gross profit margin. See the table and chart below (unit: billion yuan).
Foxconn Industrial Internet has been working in the field of electronic design development and manufacturing for a long time. Now its business and customers are all over the world, and many high-quality well-known enterprises have become its core customers. In summary, the reasons for the success of this international large enterprise are as follows:
(1) Clear direction, good at seizing opportunities. The company said it will continue to focus on the development of AI and cloud computing infrastructure products and technologies, go with the trend in the AI field, take advantage of the situation, seize the golden opportunity for AI development.
(2) Forward-looking global layout and strategic investment, strong supply chain integration ability and global delivery ability.
(3) Emphasis on improving technical capabilities. On the one hand, "one must be strong to forge iron", the company has an excellent R&D team, continuously improves process technology, vertically integrates design and manufacturing, and continuously optimizes the business model. By the end of 2023, the number of R&D personnel reached 31,792, accounting for 16.6% of the total number of company employees, and R&D expenses were as high as 10.8 billion yuan. On the other hand, it continuously deepens and cooperates with customers, improves personalized services, actively carries out joint design services, instead of the traditional "OEM factory", and enhances its irreplaceability.
(4) Strong intelligent manufacturing and digital strength. The company's digital intelligent manufacturing technology is in a leading position in the industry, actively promotes digital transformation, and regards digitalization as a key means to improve efficiency, control costs, and monitor quality. At the same time, the company continues to explore the standardization system construction of "lighthouse factories", and is committed to replicating and promoting the overall solution of digital manufacturing, and steadily promoting the digital strategic transformation. All the above have promoted the company to hold a leading position in the core business of cloud, network, terminal, and industrial internet, and also have a more intelligent, efficient, and sustainable future.II. Low gross and net profit margins, high ROE, and good profitability; growth is steady, funds are abundant, and the debt-to-asset ratio is in line with the industry model; high-quality customers, strong operational capabilities, and an increasing trend in cash dividend ratios.
Profitability: From 2015 to 2023, Foxconn's ROE (weighted) ranged from 15.63% to 33.66%, with the ROE for the last three years being 18.02%, 16.17%, and 15.63%, all exceeding 15%, indicating good profitability for the company. From 2015 to the second quarter of 2024, Foxconn's sales gross margin was between 6.73% and 10.65%, with the gross margin for the last three years and one period being 8.31%, 7.26%, 8.06%, and 6.73%. The sales net profit margin was between 3.28% and 5.28%, with the net profit margin for the last three years and one period being 4.56%, 3.92%, 4.41%, and 3.28%. The company's gross and net profit margins are both single-digit and relatively low, mainly due to the low gross margin ceiling in the electronic product manufacturing segment. The gross and net profit margins are influenced by product structure and costs, showing some fluctuations, but overall they are quite stable. This is thanks to the company's control over the period expense ratio at a stable and low level, which allows its gross margin to be lower than that of peers such as Luxshare Precision, Goertek, and Inspur Information, but its net profit margin is not the lowest.
Growth: From 2015 to 2023, Foxconn's operating income grew from 272.8 billion yuan to 476.34 billion yuan, a 0.75-fold increase, with a CAGR of 7%. The largest increase was in 2017 (+30.01%), the smallest increase was in 2021 (+1.8%), and the largest decrease was in 2023 (-6.94%). The net profit attributable to the parent company grew from 14.35 billion yuan to 21.04 billion yuan, a 0.47-fold increase, with a CAGR of 5% between 2015 and 2023. The largest increase was in 2021 (+14.8%), the smallest increase was in 2016 (+0.11%), and the largest decrease was in 2020 (-6.32%). In the first half of 2024, operating income and net profit attributable to the parent company increased by 28.69% and 22.04% year-on-year, respectively. From the end of the second quarter of 2015 to 2024, the total assets grew from 109.695 billion yuan to 293.249 billion yuan, a 1.62-fold increase; the net assets attributable to the parent company grew from 59.525 billion yuan to 138.684 billion yuan, a 1.36-fold increase. Considering Foxconn's large scale, it is not strictly a company with significant growth.
Operational capability: From 2015 to the end of the second quarter of 2024, Foxconn's accounts receivable turnover days ranged from 62.04 to 75.21 days, with the last three years and one period being 71.20 days, 64.95 days, 70.34 days, and 64.38 days, respectively; accounts payable turnover days ranged from 51.17 to 69.51 days, with the last three years and one period being 59.79 days, 53.47 days, 59.31 days, and 58.57 days, respectively; inventory turnover days ranged from 34.63 to 63.29 days, with the last three years and one period being 52.38 days, 56.60 days, 63.29 days, and 57.27 days. The net operating cycle days for the last three years and one period ranged from 63.08 to 74.32 days.
The company mainly adopts a direct sales model with large customers, resulting in a low sales expense ratio. Considering that the customers are mainly high-quality global customers, coupled with the catalyst of the rise of the AI and industrial internet industries, the company's operational indicators all perform well.
The company's net profit cash content for the last three years was 43.6%, 76.55%, and 204.77%, respectively. According to the 2023 annual report data, the company's top five customers accounted for a high revenue ratio of 65%, indicating that the company's net profit cash content is susceptible to fluctuations in large customer payments and varies significantly. The company's net operating cash flow performance in 2023 was good.
Debt repayment ability: From 2015 to the end of the second quarter of 2024, Foxconn's debt-to-asset ratio ranged from 42.89% to 81.03%, with the debt-to-asset ratio for the last three years and one period being 55.18%, 54.49%, 51.13%, and 52.57%, respectively. The current ratio ranged from 1.14 to 2.1, and the quick ratio ranged from 0.81 to 1.59. The current ratio and quick ratio for the last three years and one period were all greater than 1. As of the end of the second quarter of 2024, the company had 68.478 billion yuan in cash on hand, 29.748 billion yuan in short-term borrowings, and 3.65 billion yuan in long-term borrowings, indicating that the company's funds were relatively abundant. Foxconn's debt-to-asset ratio is higher than 50%, and the leverage ratio is relatively high, which is in line with the operating model of the electronic product manufacturing industry.
Dividend payout ratio: From 2018 to 2023, Foxconn's dividend payout ratios were 15.15%, 21.36%, 28.49%, 49.43%, 54.43%, and 54.77%, respectively. In recent years, the company's dividend ratio has increased.
III. In 2024, the market performance increased by more than 40%, and the current PE valuation indicator is not low, with institutions unanimously predicting a positive future outlook.
According to the consensus forecast, the operating income for 2024-2026 is expected to be 562.4 billion yuan, 658.7 billion yuan, and 745.3 billion yuan, respectively, with net profit attributable to the parent company expected to be 25.5 billion yuan, 31.1 billion yuan, and 35.9 billion yuan, respectively. The PE ratios are expected to be 15.89, 13.02, and 11.28, respectively, and the PEG ratios are expected to be 0.75, 0.59, and 0.73, respectively.Combining historical data, the maximum PE (TTM) of Foxconn Industrial Internet is 31.69, and the minimum is 7.79. The maximum PEG (historical) is 85.26, and the minimum is -2.87.
As of the close on October 16, 2024, Foxconn Industrial Internet's stock price has soared by as much as 61.83% in 2024. Looking at its PE percentile, this valuation is clearly not low, but its PEG percentile is in a relatively low range, mainly due to institutions' optimistic attitude towards its future performance growth.
Foxconn Industrial Internet has laid out its business in digital economy, AI, industrial internet, consumer electronics, and other sectors. Some businesses are in the boom period, while others are still in the development stage. However, for such a company with strong comprehensive strength, its globalization process is unstoppable regardless of the boom or not!
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