Investment researcher Citigroup has cut the target price for Hon Hai Precision Industry Co (鴻海精密) amid concerns that stiff price competition would weigh heavily on profit expansion, according to its latest report.
Hon Hai, the nation's leading electronics manufacturing service provider, makes a wide range of products for big global brands such as Apple Computer Inc, Dell Inc, Nokia Ojy and Sony. The Citigroup report came ahead of the release of Hon Hai's third-quarter results scheduled for today.
"We continue to prefer Acer Inc and Foxconn International Holdings, which have outperformed Hon Hai since May, andwe forecast the trend will continue on their faster earnings growth," Citigroup analyst Kirk Yang (楊應超) said in the report released on Thursday.
Foxconn International Holdings (富士康), which is listed on Hong Kong stock market, is a handset manufacturing unit of Hon Hai.
Yang lowered Hon Hai's 12-month target price to NT$139 (US$4.14) from NT$140, leaving the "sell" rating unchanged. As of Friday Hon Hai shares had declined 6 percent to NT$143.5 since the beginning of this month on the Taiwan Stock Exchange.
Yang, head of technology-hardware research in Asia at Citigroup's Smith Barney, expected Hon Hai's growth strength to weaken to high single digit figures year-on-year from double digits due to a fall in net margins.
Hon Hai may post NT$9.7 billion in unconsolidated earnings for the three months period ending September, he projected. That would be a 23-percent expansion compared to NT$7.89 billion during the same period last year.
But, margins may decline to 5.9 percent from 6.3 percent in the second quarter and from 7.1 percent in the first quarter, Yang said. Margins were even higher at 6.63 percent in the third quarter of last year.
"Thanks to severe price competition from Asustek Computer Inc (華碩電腦) and Flextronics International Ltd, we see little near term stabilization of margins," Yang said in the report.
Besides, Hon Hai would face mounting competition in the years to come as its bigger rival, Flextronics of Singapore, is looking to cooperate with other Taiwanese hardware manufacturers including Asustek and Compal Electronics Inc (仁寶電腦), Yang added.
Compal is the world's second-largest notebook computer maker while Asustek is the biggest maker of computer motherboards. A Chinese-language newspaper reported earlier this month that Compal and Flextronics will form a joint venture in Shanghai, with Compal taking a 40 percent-stake in the US$15 million company. Compal will outsource notebook and handset manufacturing services to the new entity.
Hon Hai is competing with Asustek for the assembly of i-Pods, for Apple Computer Inc, as well as in the area of making motherboards for computer vendors.
Hon Hai earlier this month posted record high sales of NT$164.39 billion for the third quarter, up 48 percent from NT$110.76 billion a year ago.
Yang said the impressive sales growth would mostly come from the high-volume, low-margin products such as Apple's i-Pod Nano and Sony's popular PlayStation game console.
He raised his forecast for this and next year by roughly 12 percent and 20 percent respectively in the wake of stronger-than-expected sales growth, according to the report. Hon Hai may report earnings of NT$38.01 billion for this year and NT$43 billion for next, respectively, from its previous estimates of NT$34.02 billion and NT$35.7 billion, he added.
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