The outlook is weakening for Foxconn amid rising Chinese coronavirus infection rates and accompanying lockdowns. The business is Apple’s main contract manufacturer of iPhones, which topped global smartphone sales rankings last year. Fourth-quarter profits at Hon Hai — the name under which Foxconn is listed in Taiwan — beat expectations. Cash flow figures tell a gloomier story.

Foxconn’s quarterly profits forecast exceeded at NT$44bn ($1.6bn), a 3 per cent decline on sales that were 6 per cent lower. The company, which assembles about 70 per cent of the world’s iPhones, remains dependent on its consumer electronics business for 60 per cent of its sales.

The business of assembly and contract manufacturing has always involved razor-thin operating margins, currently less than 3 per cent. In hopes of fattening these, Foxconn has been moving into electric vehicles and low-end chipmaking. On the face of it, forecast EV sales growth of seven times until the end of 2030 to more than 30m vehicles compares favourably with the outlook for contract manufacturing smartphones.

But the shift is proving too slow and too expensive. Liabilities have grown. Net cash has more than halved. Free cash flow turned a negative NT$190bn last year, from a positive NT$312bn. The components business accounts for just 6 per cent of group sales.

Foxconn has, meanwhile, been forced to suspend most of its operations in Shenzhen, which analysts estimate represent around a fifth of its total iPhone production capacity. If China’s coronavirus outbreak triggers wide, extended lockdowns, the company would also lose production from big assembly plants in Zhengzhou. Foxconn faces a cocktail of other risks, including chip shortages.

The shares have fallen 17 per cent in the past year. At 10 times forward earnings they trade at a steep discount to Chinese rival Luxshare. The gap doubts reflects over Foxconn’s capital-intensive bet on chipmaking and EVs.

The group has limited options for boosting cash flow. Dividend yields of 4 per cent are already down from the 5.5 per cent in 2020. A return to those levels looks unlikely. Avoid.