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Fierce rivalry stunts Compal's growth

Compal Electronics Inc (仁寶電腦), the world's second-largest contract maker of laptop computers, yesterday said first-quarter earnings fell from a year earlier as gross margins shrank on fierce competition.

As demand will remain tepid in the second quarter, a conventionally slow season for the computer industry, Compal president Ray Chen (陳瑞聰) said, "now we're pinning our hope on the third quarter for stronger growth."

"Sales will edge up 5 percent on a quarterly basis in the second quarter and demand will be sagging as usual. This should be an industry-wide trend," Chen said.

Compal, which supplies notebook computers to computer brands like Dell Inc, said earnings slid 3 percent to NT$1.63 billion in the three-month period to March, from NT$1.69 billion a year earlier.

During the same period, gross margins contracted faster to 5.8 percent, a level hit in the final quarter of last year, compared to 7.1 percent a year ago. Earnings per share was flat at NT$0.05, compared to NT$0.49 last year.

Sales, however, climbed 18 percent to NT$50.06 billion from NT$42.5 billion a year ago.

"Margins have dropped constantly since the first quarter of last year as our local rivals have slashed prices to snare orders," Chen said.

After a short-term reprieve, Chen expected the downtrend to resume in the second half of the year, but the pace will slow down in light of already slim margins.

Despite the lukewarm quarterly results, the company successfully shrugged off investors' concerns about a possible foreign-exchange loss, which dogged most computer-related companies. Compal made NT$81 million in foreign currency exchange in the last quarter.

Looking ahead, Chen said his company is aggressively diversifying into new growth areas such as liquid-crystal-display (LCD) televisions and related products, including digital tuners and set-top boxes, which enable traditional TVs to receive digital signals.

"The LCD-TV industry is the only industry that will show explosive growth in the next three to five years. To enter the market, we plan strategic alliances or integration with companies already in the industry," Chen said.

He said that Compal has been approaching TV vendors and he expected to see significant growth in the next quarter.

But, Compal seems unable to cater to investors looking for stocks with strong growth momentum.

"As margins keep falling, we don't think Compal will show strong growth potential. The stock market is losing its attraction," said Wu Pei-wei (吳佩偉), a fund manager with ABN AMRO Asset Management in Taipei. Wu does not hold any Compal shares.

Compal's share price has dip-ped around 11 percent to NT$28.25 yesterday from the beginning of the year, which exceeded the TAIEX's 6 percent loss during the same period.
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