Future looks bright for Hon Hai

Hon Hai Precision Industry Co (鴻海精密), the country's biggest electronics company by sales, will probably report a 46 percent increase in third-quarter profit as sales of computers and video-game consoles surged after the SARS outbreak.

Hon Hai's net income probably rose to NT$6 billion (US$177 million) from NT$4.1 billion a year earlier, based on the median estimate of five analysts in a Bloomberg News survey.

The company, which said it will announce earnings this month, earlier reported sales rose 53 percent to NT$98.2 billion.

Sales at Hon Hai, which makes PlayStation 2 game consoles for Sony Corp and personal computers for Hewlett-Packard Co, have picked up since the second quarter when biggest customer Sony shipped fewer consoles amid the SARS epidemic.

Also boosting earnings, Hon Hai is moving some of its production to China to cut costs, analysts said.

"The company had a turnaround in July supported by game consoles and personal computers," said William Fong (方偉昌), an analyst with Primasia Securities in Taipei.

"Hon Hai's income from investments in China increased," he said.

Hon Hai posted sales growth of more than 35 percent every quarter since at least 1998 until the SARS outbreak. Revenue in the second quarter grew 6 percent.

The company's shares have gained 53 percent this year, compared with a 35 percent rise on the TAIEX.

Hon Hai's third-quarter results may affirm signs of a recovery in the global electronics industry.

Flextronics, the world's biggest maker of electronics for other companies, on Aug. 19 forecast sales in the July-September period would be at least as high as a year earlier. Solectron Corp, which has had losses for 10 straight quarters, said it expects to return to profit in the quarter ending Aug. 31 next year.

Hon Hai provides little information on its operations, according to analysts.

Fong said he tracks the company by talking to Hon Hai employees and collecting data from its customers.

Grace Chen (陳星嘉), an analyst with Insight Pacific Investment Research (月涵投顧), said she quit covering Hon Hai earlier this year.

"We couldn't provide much value added in our coverage," she said. "The information Hon Hai provides is quite limited."

Hon Hai's return on equity was 27 percent last year, the highest of the nation's 20 largest companies by sales.

The company's debt-to-assets ratio last year declined to 4.8 percent from 9.4 percent in 2001 and 20.6 percent in 2000. The company has to pay NT$32.4 billion of bonds that mature between 2005 and 2008, according to Bloomberg data.

Standard & Poor's has assigned a BBB rating to Hon Hai's debt, the second lowest of 10 investment grades.

The company is diversifying, taking a stake in a NT$10 billion flat-panel display venture that will be 50 percent privately owned by Hon Hai chairman Terry Kuo (郭台銘).

Kuo sold some of his shares in Hon Hai to buy a stake in the venture, Innolux Display Corp, which will make screens for wall-mounted televisions and other products.