• Over the weekend, there were numerous reports, including from Reuters and The Guardian, saying that Apple’s launch of iPhone 8 and 8 Plus around the world received lukewarm response relative to previous launches.

• According to The Guardian, hundreds of people would usually gather outside Apple’s store in Sydney to welcome new iPhone launches. However, there were fewer than 30 people in queue before the store opened on Friday.

• Concurring with Fox Business and Reuters, we believe this indicates that consumers are holding back purchase for iPhone X, which is scheduled for release this November. This is also verified by an article from Quartz, which said that most reviewers recommended waiting for iPhone X. In other words, we believe expectations vis-à-vis Inari’s radio frequency (RF) testing revenue remain intact despite the reports.

• On another note, several online reviews pointed out that feature/functionality upgrades of the three new models, compared to iPhone 7 and 7 Plus (the Sevens), are minimal. While this is true to a certain extent, the new iPhone models offer significant upgrades for models before the Sevens.

• Data from David Smith, an influential independent iOS developer, shows that models prior to the Sevens accounted for more than 80% of iPhone device share as of 22 Sep 2017 (see Exhibit 1). This implies that the triviality of the functionality upgrades has little impact on the demand for the new models, as replacements could still come from the bigger pool (>80%) of older-generation iPhone users.

• In addition, we note that the 6 and 6S models currently occupy the highest percentage of iPhone device share. This means that the launch of the anniversary phone (iPhone X) is timely, coinciding with iPhone’s average device age (or replacement cycle) of 2-3 years.

• All-in, we believe the additional model (iPhone X) introduced on top of the two conventional lines, coupled with new features such as wireless charging and TrueDepth camera (3D depth sensing capability) would underpin Inari’s earnings growth of 35% in FY18F.

• However, despite bright prospects, we are keeping our HOLD recommendation on Inari as the stock trades near its fair valuation. Inari is currently trading at a CY18F PE of 17x vs. industry average of 14x.

Source: AmInvest Research - 25 Sept 2017