Broker: UOB Kay Hian
Date of Report: Monday, 18 August 2025

Foxconn Industrial Internet: Riding the AI Server Boom With Strong 3Q25 Outlook and Upgraded Earnings Forecasts

Company Overview: Foxconn Industrial Internet (601138 CH)

Foxconn Industrial Internet (FII) stands at the forefront of the communication and cloud infrastructure revolution. The company specializes in developing and selling a broad array of products, including network switches, routers, wireless devices, webservers, set-top boxes, smart home gateways, and storage equipment. As a leading EMS/ODM player, FII leverages its best-in-class engineering and manufacturing prowess to deliver high-performance networking and precision components for the global market.

Stock Snapshot

• Current Share Price: RMB44.86
• Target Price: RMB49.50 (Raised from RMB41.00)
• Upside: +10.3%
• Market Cap: RMB 890,896m (US\$125.5bn)
• 52-Week High/Low: RMB45.8 / RMB14.6
• YTD Performance: +108.7%
• Major Shareholder: Wu Changhong (6.91%)

Strong 3Q25 Guidance: AI Server and Cloud Equipment Drive Growth

FII has delivered a robust 3Q25 outlook, projecting solid growth across networking equipment, cloud equipment, and precision components. The momentum is underpinned by several key drivers:

• High-Speed Networking Switches: Accelerated production ramp-up, especially for 800G switches, with 1.6T switch development underway and co-packaged optics in the pipeline.
• Improved Assembly/Yield for GB200 Racks: Production yield is now exceeding 1,000 deliveries per month, with the company expecting to ship over 4,500 racks in 3Q25 — a threefold jump from 2Q25.
• AI Server Revenue Surge: Anticipated 1.7x year-on-year and 1.0x quarter-on-quarter growth, with AI servers’ share of cloud equipment revenue set to surpass 65% in 3Q25. The GB200 rack alone is expected to contribute 50% of total cloud equipment revenue.
• ASIC Server Shipments: Commencement of ASIC server shipments (notably for Amazon) in 4Q25, with meaningful revenue impact expected in 2026.
• Stable Smartphone Demand: Serving as a reliable baseline for overall business stability.

GB300 and Technology Transition: Staying Ahead of the Curve

FII is set to begin shipments of GB300 racks from 3Q25, with demand potentially reaching 1,000 units per month. The industry is projected to transition from GB200 to GB300 racks by 2Q26, positioning FII as a leader during this rapid product cycle shift. With competitors offering more conservative shipment guidance, FII’s focus on yield improvement is likely to help it maintain a dominant global share in the AI server ODM market — a space characterized by swift innovation and evolving product cycles.

Financial Highlights and Upward Revisions

UOB Kay Hian has upgraded FII’s earnings outlook for 2025-2027, reflecting the company’s strong 3Q25 guidance and expectations of higher ASIC server contributions. Earnings estimates for 2025, 2026, and 2027 have been increased by 8.3%, 20.8%, and 25.1% respectively, with the company benefiting from operational scale and a lower opex ratio.

Key Financials (RMB Millions)

Segment Breakdown and Outlook

• Networking Equipment: 800G switches revenue expected to grow 15x year-on-year from a low base, with the company also developing 1.6T switches and co-packaged optics.
• Cloud Service Equipment: Substantial revenue upgrades, with 2025-2027 forecasts lifted by nearly 20-33% as AI server and GB300/GB200 transitions accelerate. Cloud equipment gross margin remains robust, with AI servers accounting for over 65% of segment revenue in 3Q25.
• Robots and Technology Services: Stable forecast, with revenue projected at RMB800m-950m for 2025-2027.

Balance Sheet and Cash Flow Analysis

• Cash Position: Cash and short-term investments are expected to see significant fluctuations, reflecting working capital requirements and operational scale-up. 2025F ending cash is projected at RMB33.5bn, rebounding to RMB56.6bn in 2026F.
• Debt and Leverage: Short-term debt remains at RMB35.9bn, with no long-term debt forecasted. Net debt to equity is projected at 1.4% for 2025F, returning to negative by 2026F and 2027F.
• Operating Cash Flow: Notably negative in 2025F (-RMB16.1bn) due to aggressive working capital investments, before swinging sharply positive to RMB51.7bn in 2026F.

Profitability and Growth Metrics

• Gross Margin: Expected at 6.2% in 2025F, dipping slightly to 5.9% in 2026F and 2027F, reflecting the scale-driven nature of the business.
• Net Margin: Stable between 3.5% and 3.6% across forecast years.
• ROE: Projected to climb from 15.9% in 2024 to 24.5% in 2027F, underlining superior capital efficiency.
• Turnover Growth: Explosive 59.8% growth projected for 2025F, moderating to 30.9% in 2026F and 14.8% in 2027F as the base expands.

Valuation and Recommendation

• Valuation: Target price raised to RMB49.50, based on higher 2026F earnings and an unchanged PE multiple of 21.7x, which is 2 standard deviations above the historical mean. The premium is justified by FII’s leadership in the AI infrastructure cycle.
• Recommendation: Maintain BUY. FII is primed to capture the ongoing surge in AI server demand, and its rapid innovation cycle gives it a sustainable edge in the global market.

Risks and Earnings Sensitivities

• AI Server Yield Ramp-Up: The company’s ability to maintain superior production yield is key to sustaining market share and driving earnings.
• Product Cycle Transitions: The fast-moving ODM sector means ongoing risks from technological shifts — FII’s agility is a critical advantage.
• ASIC Server Ramp: Higher-than-expected contributions from ASIC server shipments could further boost earnings, especially from 2026 onwards.

Conclusion: FII’s Dominance in AI Infrastructure Set to Continue

With a strong 3Q25 outlook, industry-leading yield improvements, and upgraded financial forecasts, Foxconn Industrial Internet is well-positioned to ride the AI infrastructure boom. Its dominance in the ODM AI server market, ongoing innovation in high-speed switching, and robust financials make it a top pick for investors seeking exposure to secular cloud and AI growth trends.