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Quanta Computer seeking new profit drivers

AU Optronics Corp chairman Lee Kun-yao, second right, and Quanta Computer chairman Barry Lam, second left, along with two colleagues join hands at a press conference on April 7 to announce that Quanta Computer is selling its LCD panel affiliate Quanta Display Inc to AU Optronics. PHOTO: FANG PIN-CHAO, TAIPEI TIMES

Faced with shrinking margins in the computer business, Quanta Computer (廣達電腦), the world's largest contract laptop maker, is moving aggressively into the market for emerging products to secure its future growth and profitability, analysts said.

The company announced last month that it was setting up a liquid-crystal display (LCD) television venture with Japan's Sanyo Electric Co, and said earlier this month that it would sell its LCD panel affiliate Quanta Display Inc (廣輝電子) to AU Optronics Corp (友達光電).

"Quanta is attempting to extend its foothold into other business areas, which will be able to inject momentum into the company's growth in the future," said Molly Lin (林美如), an analyst at Polaris Securities Group (寶來證券).

The computer maker realizes that instead of putting all its eggs into the laptop-manufacturing basket, the company better set its sight on other burgeoning product segments, such as LCD TVs and handheld devices, she said.

"These recent partnerships show that Quanta is eager to secure future potential cash cows, as it tries to lower its reliance on notebooks. We expect to see more mergers and acquisitions from the company soon."

Molly Lin, an analyst at Polaris Securities Group

More than 80 percent of Quanta Computer's revenues were generated from notebooks last year, while servers, handhelds and LCD TVs each accounted for less than five percent of its sales, according to Lin's estimate.

Indeed, Quanta Computer's quest to boost its profitability has been challenging in recent years.

The company reported a 24 percent annual increase in sales to NT$403.1 billion (US$12.41 million) last year, according to its pre-audited financial statement released on April 3.

However, the company's net income saw a 9 percent dip to NT$10.9 billion in the same period, with earnings per share declining to NT$3.37 from NT$3.7.

Quanta Computer's gross margin also edged up a mere 0.7 percentage points to 5.9 percent last year, as the company, along with other laptop computer makers, struggled to maintain its profitability.

This year, the company has set a higher target by vowing to increase its global notebook shipments to 25 million units, up from 18 million units last year.

However, Albert Chen (陳立恆), an analyst with the Taipei-based Market Intelligence Center (市場情報中心), said that the company might miss its target this year, as its growth momentum appeared weak following US computer supplier Dell Inc's decision to shift a larger volume of its order for commercial laptops to its local rival, Compal Computer Inc (仁寶電腦).

"Quanta has no choice but to think of new ways to recover," Chen said.

According to Chen, with most computer makers posting feeble margins of 4 percent of lower as a result of stiff competition and product maturity, the 10 percent margin offered by LCD TV production looks too good to resist.

That's why Quanta Computer and its rival, Compal Computer, have both jumped on the flat-screen TV bandwagon, he added.

To secure an upper hand in the market, Quanta Computer moved quickly by announcing on March 17 that it was setting up a joint venture with Sanyo.

Quanta Computer's chief operating officer Michael Wang (王震華) told reporters at the time that while the firm is a new entrant in the LCD TV scene, it is betting heavily on the exponential growth from this product.

"We are banking on the flat-panel TV market, as it will expand at a vigorous pace over the next four to five years," he said.

Wang said that flat-panel TVs, which were introduced in 2002, looked poised to surpass conventional cathode-ray tube TVs and account for more than 50 percent of the global TV market by 2009.

In comparison, laptop computers would need around 18 years from their introduction to be able to overtake desktop computers and account for half of the global computer market by 2008, he said.

And that's not the limit of Quanta's ambitions.

In a surprise move on April 7, the company announced that it was selling off its affiliate Quanta Display to AU Optronics, the third-largest manufacturer of LCDs in the world.

The combined entity will create a bigger LCD-panel maker whose market share could exceed that of market leaders Samsung Electronics Co and LG.Philips LCD Co, according to iSuppli Corp.

By saying goodbye to its money-losing affiliate, Quanta Computer would see an easing of its cash flow and financial burdens, Lin said.

According to Taiwan Stock Exchange statistics, Quanta Display posted a net loss of NT$9.14 billion, or a loss per share of NT$2.16, in the first three quarters of last year. The company had recorded a net income of NT$8.53 billion, or earnings per share of NT$2.16, for the full year in 2004.

According to Ken Yu (余文耀), an analyst with SinoPac Securities Corp (建華證券), this latest deal may strengthen Quanta Computer's relationship with BenQ Corp (明基), which owns around 9 percent of AU Optronics' shareholding.

Chances are high that BenQ will outsource its new BenQ-Siemens handset production to Quanta Computer, which is losing out in this segment to strong rivals such as Compal Communications Inc (華寶通訊), he said.

"The AU Optronics-Quanta Display merger has laid out a complementary foundation for both BenQ and Quanta Computer, but how the latter can really benefit from this will depend on whether its handset technology can meet BenQ's requirements," Lin said.

Quanta Computer has not been faring well in the handset market, with only a handful of orders from Panasonic and older Siemens models, she said.

"These recent partnerships show that Quanta is eager to secure future potential cash cows, as it tries to lower its reliance on notebooks," Lin said.

"We expect to see more mergers and acquisitions from the company soon," she added.
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