Compal Communications Inc (
But the decline in gross margin will be slight, Compal chairman Ray Chen (
Compal Communications, the handset-making subsidary of Compal Electronics Inc (仁寶 電子), reported a gross margin of up to 17 percent in producing high-end handsets for international mobile phone brands in the third quarter.
Compal is 57-percent owned by Taiwan's No.2 notebook computer maker, Compal Electronics.
As the company plans to manufacture entry-level handsets in a leased factory in Nanjing as early as the second quarter next year, it is expected to reach between 4 percent and 8 percent in gross margin for low-end handset manufacturing.
"It's unavoidable to see the gross margin come down. But the slight decline will be offset by a spike in handset shipments next year and by our cost-saving measures," Chen explained.
Compal's handset shipments will more than double next year to around 7.5 million, of which 40 to 50 percent will be entry-level phones, according to Chen.
"With those measures in place, I believe Compal will be able to maintain its operating margin," Chen added.
Compal makes Motorola Inc's high-end T365 and V360, which support advanced GPRS, or General Packet Radio Service, network technology.
As Motorola's major local partner, Compal sends half of its shipments to the world's third-largest cellphone vendor.
Chen's comments are aimed at mitigate investor's concerns over possible profit erosion as a result of the company's strategy of migration to the low-end mobile phone market.
One analyst said he was feeling some relief and held a positive view about Compal's extension into low-end cellphone manufacturing.
"At least the gross margin decline won't be as steep as we thought, since Chen said low-end models are not limited to those with gray-scale phones, from which handset makers can only squeeze narrow margins," said Roger Lin (林峻毅), an industry analyst with Pacific Securities (太平洋證券).
In addition, the demand for entry-level phones -- including some color-screen phones with less advanced functions -- will remain strong in emerging markets including China and Latin America.
"I don't think it [making entry-level handsets] will be a big problem for Compal. It's worth doing to boost profits at the expense of a minimal drop in gross margin," Lin said.
Lin forecasted that the gross margin would only fall by about 2 to 3 percent from the 17 percent recorded in the third quarter.
Compal's earnings, however, will surge by nearly 43 percent to about NT$10 per share next year from the NT$7.09 that Compal Communications estimated for this year.
Compal said last month's revenue tripled to NT$2.16 billion, compared to the NT$590 million it recorded a year ago.
The November revenue, up 10 percent form that of October, also marked a record high for the fourth month in a row, the company said.
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