Hon Hai may report rise in profits

Hon Hai Precision Industry Co (鴻海精密), the nation's largest electronics company, will probably say second-quarter profit rose as the company made more game consoles and mobile phones for customers such as Sony Corp and Motorola Inc.

Net income may rise 9.2 percent to NT$8.3 billion (US$257 million), from NT$7.6 billion a year earlier, according to the median estimate of five analysts surveyed by Bloomberg News.

Sales, announced earlier, gained 62 percent to NT$141.7 billion.

Chairman Terry Gou (郭台銘), Taiwan's richest person, is counting on increased demand for Sony's PlayStation Portable videogame player and Motorola's Razr mobile phone to raise earnings. Sony, which will sell its PSP device in Europe next month, expects to sell 13 million units worldwide in the year ending March 31. Global handset sales are expected to rise 16 percent this year, according to market researcher Gartner Inc.

"Hon Hai is the model citizen among Taiwan's made-to-order electronic manufacturers," said Mike Shiao (蕭光一), a fund manager at Invesco Taiwan Ltd (景順投信), which counts Hon Hai stock among the US$1.5 billion he manages. "Hon Hai's ability in product innovation and production execution is unrivaled in Taiwan."

Taipei-based Hon Hai, which is required to report results by the end of this month, said on June 14 that demand in the third quarter will be "particularly good" as companies start preparing inventories of consumer electronics before the year-end holiday season.

Global sales of mobile phones will rise faster than previously expected this year as consumers snap up handsets with cameras and music players and demand increases in countries such as India, according to Stamford, Connecticut-based researcher Gartner Inc. Handset makers will sell 779 million mobile phones in 2005, according to Gartner.

Shares of Hon Hai have gained 16 percent so far this year, compared with a 9 percent gain in the nation's TAIEX index.

Even so, profit margins are thinning amid increased competition. Singapore-based Flextronics International Ltd, the world's largest contract electronics manufacturer, is the biggest competitor of Hon Hai.

Flextronics supplies mobile phone handsets to companies such as Sony Ericsson Mobile Communications Ltd and the Xbox videogame console for Microsoft Corp.

The handset and game console business is "competitive, and margins on these products are likely to face downward pressure," Kirk Yang (楊應超), an analyst at Citigroup Inc, wrote in a report dated Aug. 24. He has a "sell" rating on Hon Hai.

Yang forecasts Hon Hai's net income margin will fall to 3.7 percent in 2006 after it dropped to 4.5 percent this year from 5.5 percent last year and 6.2 percent in 2003. Profit margin is the percentage of sales that a company earns after subtracting costs.

Most of the growth will come from "lower-margin products," Yang wrote in the report. "Hon Hai can continue its double-digit sales growth in the next few years."

Hon Hai's main business of making desktop computers is also facing slimmer margins. Hewlett-Packard Co is Hon Hai's biggest client, accounting for as much as a quarter of its sales, according to Yang.

In the second quarter, the average selling price for a desktop computer fell 11 percent to US$850 from US$960 a year earlier, George Shiffler, an analyst at Gartner said.