Merrill Lynch bullish on High Tech and handsets

Merrill Lynch yesterday lifted the target price for Taiwanese handset maker High Tech Computer Corp (宏達電子) to NT$600, citing brisk demand from its telecom carrier clients for third-generation (3G) mobile phones.

The upgrade represents a 28-percent upside for High Tech shares in the next 12 months, compared to the closing price of NT$468 yesterday on the Taiwan Stock Exchange.

Merrill Lynch prefers companies with direct exposure to carriers, or with leading positions at original design manufacturing (ODM) or electronics manufacturing service (EMS) companies, said analyst Tony Tseng (曾省吾) in the research house's latest report.

"High Tech is our top pick," Tseng said.

High Tech supplies handsets for the world's major mobile operators such as T-Mobile and Vodafone, and recently Sprint Next Corp of the US. High Tech is also the world's largest maker of handheld devices operating on Microsoft Windows, with a market share of over 50 percent.

Tseng raised the price objective for HTC to NT$600 in the next 12 months, up 18 percent from the previous figure of NT$510, with his buy rating unchanged, citing strong momentum on 3G.

Telecom carriers, particularly in Europe, are much more interested in branding their 3G handsets now that the 3G market around the globe is really taking off, Tseng said.

Tseng said Merrill Lynch's research team found that Vodafone and T-Mobile recently started to buy their own-brand phones directly from ODM's.

Merrill Lynch's bullish comments on High Tech prompted a spike of 7-percent of the daily limit for the company's stock price yesterday, in contrast with the performance of the benchmark TAIEX which declined on growing avian flu fears.

Overall, Tseng is positive about Taiwan's handset sector, including Hon Hai Precision Industry Co's (鴻海精密) Hong Kong-listed handset manufacturing unit Foxconn International Holdings (富士康), riding on the trend of more outsourcing from the world's major mobile phone brands.

The world's top five handset vendors are expected to farm out more production, some 32 percent of their total output in 2007, up from an estimate of 22 percent last year, according to Merrill Lynch.

Benefiting from the expected increase in outsourcing, Foxconn International would overtake Singaporean Flextronics International Ltd as the world's biggest handset EMS provider this year by market share due to robust demand from its customers, Motorola Inc and Nokia Oyj, Tseng said.

Tseng reiterated his buy rating on Foxconn International with a 12-month price objective of HK$10.5.

However, he had a sell rating on BenQ Corp (明基) due to concerns over the company's acquisition of Siemens AG's money-losing mobile device unit.

He was also cautious about Compal Communications Inc (華寶通訊) due to high customer concentration. Compal Communications now ships 90 percent of its products to Motorola, according to Tseng. He rated Compal neutral.