Analysts give Asustek plan a strong vote of confidence

Investment banks yesterday suggested that bargain hunters should buy Asustek Computer Inc (華碩) shares, giving a vote of confidence to the company's fresh restructuring efforts that are aimed at boosting efficiency.

Asustek, which supplies computer motherboards for PC vendors including Dell Inc, announced the much-anticipated reorganization plan to split its brand and contract manufacturing business during an investor meeting yesterday.

The company's regrouping plan would be quite similar to that of Acer Inc.

Acer, the world's No. 5 computer brand, spun off its manufacturing business around five years ago to create a new company, Wistron Inc (緯創), which focuses on making PCs on a contract basis.

That move came to dispel concerns about competition from the firm's contract-manufacturing customers.

"We believe this [the restructuring efforts] will help reduce inventory and expense overruns ... [and] will lead to better execution and improved profits," Vincent Chen (陳豊丰), an analyst with CLSA Ltd in Taipei, wrote in a report released yesterday.

Asustek is scheduled to separate its brand and manufacturing businesses within three years, or perhaps even sooner, according to the report titled Unleashing the Power Within.

Optimistic about the restructuring efforts, Chen predicted that the company would post NT$24.63 billion (US$758.6 million) in net income for this year, up around 2 percent from his previous projection.

That would represent an increase of about 27 percent from the company's earnings of NT$19.4 estimated for last year.

"We see the recent correction as a good entry point," Chen wrote.

Shares of Asustek have fallen roughly 9.5 percent roughly since the beginning of the year to close at NT$90.1 yesterday on the Taiwan Stock Exchange.

Chen reiterated his "outperform" rating on Asustek with a 12-month target price of NT$115.7.

Still, although Asustek's restructuring plan came as "no surprise," it will not be easy for it to spin off its contract manufacturing unit, according to Citigroup analyst Kirk Yang (楊應超), in a report released yesterday.

The main reason for the re-organization was to prepare for the eventual separation of the own-brand business, requested by its OEM (original equipment manufacturing) customers, especially Dell and Hewlett Packard Ltd,

the report read.

Asustek would be able to create the largest economies of scale if the company had a clean break between its own-brand and contract manufacturing operations, like Acer, Yang said.

But, “We also don't expect much immediate earning impact from the new organizational changes,” he added.

Yang retained unchanged his “buy” rating on Asustek as well as the target price of NT$103.

Asustek sells computers and consumer electronics such as

liquid-crystal-display (LCD) televisions and mobile phones under the “Asus”brand, mostly in Asia.