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Special Report: Apple's new iPod family — who benefits?

Light metal-casing vendors stand to benefit the most from the launch of Apple Computer's new iPod product lines, according to Morgan Stanley's Taiwan-based original design manufacturer analysts.

"Among the iPod food chain companies in our universe, we think the light metal casing vendors will benefit the most as the revamped iPod launch is focusing more on stylish design than key feature set enhancements," analyst Ellen Tseng wrote in a extensive research report from overseas released last month.

"Given that both the new iPod nano and iPod shuffle leverage aluminum casing (either aluminum extrusion for iPod shuffle or aluminum die-casting for iPod nano), we expect this to benefit metal casing suppliers such as Catcher Technology and the Hon Hai group."

New iPod shuffle to benefit Catcher and AsusTek

According to Tseng's checks, Catcher will manufacture both the aluminum extrusion for the new iPod shuffle as well as some other magnesium inner parts spread throughout other model's in Apple's revamped iPod line.

"Although Catcher previously supplied exterior casing for the iPod mini, Catcher’s exposure to Apple iPod sales declined in [the first half of 2006] since the iPod nano launch in October 2005," she wrote. "However, with new exterior casing orders for the iPod Shuffle, we estimate iPod-related casing sales to account for 12-13 percent of Catcher’s [fourth quarter 2006] sales."

The analyst noted that the market had factored in low expectations for the iPod shuffle prior to Apple's September 12th launch event, and had instead weighed heavily on a big ramp-up on the iPod nano. However, she said the new iPod shuffle —with a form factor approximately half the size of its predecessor —arrived as a surprise with its compelling price tag of just $79.

Tseng's said downstream assemblers such as Inventec, Hon Hai, AsusTek, and Quanta will all benefit from Apple revitalizing iPod volumes. However, she believes AsusTek, which will build the new iPod shuffle, stands out as the largest potential beneficiary.

"Before the new iPod shuffle launch, Apple iPod shuffle orders reduced to 1-2 million per quarter in the first half of 2006," she explained. "However, based on the appealing size of the new iPod shuffle, and industry checks, we expect the first Apple iPod shuffle shipments to edge up to 1.5 million units in October, and volumes to sustain above 1.5 million units in November and December."

Overall, Tseng said Apple hopes to sell between 4 and 6 million iPod shuffles during the three-month period ending December, likely contributing between 3 and 4 percent to AsusTek’s revenue from October onwards. Production of the miniature players is said to have commenced last month.

iPod Roadmap

Hon Hai behind new iPod nano

Meanwhile, Tseng said Hon Hai (Foxconn) appears to be behind both the manufacturing of Apple's second-generation iPod nano as well the aluminum die-casting for its enclosure. However, she doesn't view the Taiwanese iPod nano builder as favorably as iPod shuffle maker AsusTek because she feels expectations for iPod nano sales may be overly optimistic.

"So far, according to our industry checks, Apple expects the monthly run rate for the new iPod nano to ramp up to 3.5 and 4 million from September onwards," she explained. "While we feel the risk for potential sell-through strength may persist, as the new iPod nano offers limited feature set upgrades and size reduction, we view the risk to Hon Hai’s fourth quarter earnings as minimal, given that iPod nano contributed only 4-5 percent to its sales in the fourth quarter of 2005 according to our estimates."

While Tseng said she expects Hon Hai to enjoy an uptick in revenue momentum before actual sell-through data is revealed later this year, she explained that she remains more favorable on AsusTek because actual shipments of iPod shuffles could prove more favorable when weighed against market expectations.

Inventec (IAC) seen as the losing manufacturer

Of all Apple's iPod manufacturing partners, Tseng told clients she sees Inventec (IAC) as the clear loser this time around, as it will suffer from Apple's diversification of suppliers.

"Although IAC should benefit from a resumption in iPod video growth in the second half of 2006, the company continues to suffer from shrinking order allocation from Apple for the new iPod video," she explained.

Tseng said Inventec will only account for around 70 percent of new iPod video production orders (compared to 100 percent for the previous generation of the players), with Quanta making up the remaining 30 percent.

"Although IAC’s sales exposure to Apple’s iPod business will likely remain the highest, we do not view IAC as the major beneficiary given Apple’s steps to diversify its suppliers," she said.

The analyst predicts Inventec and Quanta to combine for a monthly shipment run rate of 1 million units in September, possibly reaching 1.5 million units during the peak of the holiday season. "Yet," she wrote, "the number is likely to be lower than the 1.5 million+ monthly run rate achieved when iPod Video was first launched in the fourth quarter of 2005, due to a lack of killer functionality changes."