Analysts yesterday said investors should unload shares of Hon Hai Precision Industry Co (
"[We] expect strong sales [for Hon Hai], but margins will continue to decline," said Kirk Yang (楊應超), Smith Barney's head of Asia technology hardware research, in a report released on Tuesday following a four-hour meeting with Hon Hai chairman Terry Gou (郭台銘).
Before meeting with the analysts, Gou hosted an annual shareholders meeting, where he gave a positive outlook for the third quarter.
He also said that demand for the second half of the year would be stronger than the first.
Hon Hai, the world's second-largest electronics manufacturing service provider, reported NT$44.5 billion (US$1.4 billion) in sales for last month, up 58.85 percent from a year ago. For the first five months, revenue grew 69 percent to NT$229.1 billion from the same period last year.
The company is expanding into manufacturing 15-inch liquid-crystal-display (LCD) monitors for customers such as Dell Inc, Yang said. However, as LCD monitors usually carry high average selling prices (ASPs) but low profitability -- with around 1 percent to 2 percent net margins -- amid intense competition, this new business would drag down Hon Hai's net margins, he said.
The market watcher predicted that Hon Hai's net margin would decline to 4.5 percent this year and again to 3.7 percent next year from 5.5 percent last year, which would in turn depress the company's return on equity (ROE) ratio to 24 percent this year and 22 percent next year from 28 percent last year.
Hon Hai shares closed up 0.89 percent at NT$169.50 yesterday.
Yang suggested that investors sell Hon Hai shares and switch to the company's handset unit Foxconn International Holding Ltd (富士康), listed in Hong Kong, and Acer Inc, the world's fifth-largest laptop vendor, for faster earnings growth, with target prices of HK$5.06 (US$0.65) and NT$62 respectively.
Acer shares closed up 0.16 percent at NT$61.50 yesterday on prospects for notebook demand.
"Notebook demand is 5 to 10 percent better than expected," JP Morgan Chase & Co's hardware analyst Jenny Lai (
Lai attributed the strong demand to attractive retail prices, which dropped to some US$1,200 from US$1,270 per unit in March.
"In light of short-term strength, we believe that solid growth in the range [of 25 to 35 percent] should be sustainable," Lai said.
JP Morgan named Acer and Asustek Computer Inc (華碩) stocks as its top picks with target prices of NT$73 and NT$108 respectively. Asustek closed down 0.33 percent at NT$89.50 yesterday.
To capitalize on the volume strength of the notebook PC sector, JP Morgan gave overweight status to Acer and Asustek, which it said would benefit from strong profit expansion driven by their own-brand notebooks, with Acer experiencing improvement in market share and profitability in its US operations.
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