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Hon Hai profits slow to 7 percent on Sony, SARS

Hon Hai Precision Industry Co (鴻海精密), Taiwan's largest electronics manufacturer, may say profit growth eased to 7 percent in the second quarter after sales expanded at their slowest pace in more than five years amid the SARS outbreak.

Taipei-based Hon Hai, which makes PlayStation 2 video-game consoles for Sony and personal computers for Hewlett-Packard Co, will report net income of NT$4.4 billion (US$128 million), from NT$4.1 billion a year ago, according to the median forecast of five analysts surveyed by Bloomberg. Sales, reported earlier, rose by a similar percentage to NT$61.3 billion from NT$57.5 billion.

Sales growth tumbled below 35 percent for the first time since at least 1998 as Sony shipped fewer PlayStation 2s, while the SARS outbreak may have affected computer and other orders. Hon Hai boosted annual sales more than tenfold between 1997 and last year, benefiting from a trend of brand-name electronics companies contracting out their manufacturing.

"The slower growth in sales was specifically a function of the game-console segment," said Jeffrey Su, an analyst with CLSA Asia-Pacific Markets. "Sony accounts for about 20 percent of Hon Hai's sales."

Sony said last month it shipped 2.65 million PlayStation 2s in the three months ended June 30, an amount 42 percent fewer than the same quarter a year ago.

Hon Hai hasn't said when it will release second-quarter earnings, which it must report by the end of the month. The company's profit growth hasn't slipped below 10 percent since the first quarter of 2001.

Hon Hai shares rose NT$2.00, or 1.5 percent, to NT$133.50 in Taipei. The shares have gained 34 percent this year, outpacing a 23 percent rise in the TAIEX.

The company, which has factories in Asia, Eastern Europe and North America, has shifted more production to China to take advantage of lower labor costs.

Hon Hai has 35,000 workers in the southern cities of Shenzhen and Dongguan, the Central News Agency reported in April. China was the country worst affected by SARS, which disrupted business across Asia in the second quarter by preventing executives from traveling and keeping consumers at home.

The Taiwan company's expansion contrasts with shrinking revenue and widening losses at rivals Singapore-based Flextronics International Ltd, the world's biggest maker of electronics for other companies, and No. 2 Solectron Corp, based in Milpitas, California.

Hon Hai's low-cost manufacturing base and global distribution network have helped it win orders, analysts said.

"Hon Hai has better execution," said Tony Tsai (蔡東松), director of corporate ratings at Taiwan Ratings Corp (中華信評), a Standard & Poor's affiliate. The company offers lower prices and shorter delivery times than its bigger rivals, according to William Fong (方偉昌), an analyst with Primasia Securities Co.

Chairman Terry Kuo (郭台銘) founded Hon Hai in 1974 as a maker of plastic molds for electronic products. Kuo, ranked by Forbes magazine as the world's 256th-richest man, owns about a quarter of Hon Hai.

The company moved in the 1990s from making connectors and other PC components into making and assembling electronic products sold under other companies' brand names.

Hon Hai makes mobile-phone parts for Nokia Oyj and Motorola Inc, networking equipment for Cisco Systems Inc, and boards for mounting computer chips and other parts for computer makers such as Dell Inc.

The company is diversifying further, taking a stake in a NT$10 billion flat-panel venture that will be 50 percent privately owned by its chairman. Kuo sold some of his shares in Hon Hai to take a stake in the venture, Innolux Display Corp, which will make screens for wall-mounted televisions and other products.

The company's gross margin fell to 14.7 percent last year from 29.6 percent in 1998 as it increased the proportion of lower-margin contract manufacturing sales.

Hon Hai's return on equity was 27 percent last year, the highest of Taiwan's 20 largest companies by sales. The company's sales may rebound in the third quarter. It reported July sales of NT$28 billion, 31 percent higher than the same month a year ago.

"I have always been concerned about their transparency, but they always make money," said Michael Ding (丁予嘉), who counts shares in the company among the equivalent of US$4.2 billion he helps manage for International Investment Trust Co (國際投信).
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