Wed, May 17, 2006 - Page 11 News List

CLSA slashes its Asustek rating

DOWNGRADED The world's largest motherboard maker is not progressing fast enough in the spin-off of its OEM business, analysts said, as they cut its target price

By Jason Tan  /  STAFF REPORTER

CLSA Ltd yesterday downgraded its rating for Asustek Computer Inc (華碩電腦), the world's largest motherboard maker, citing sluggish growth in the desktop computer industry and slow execution in separating its brand and contract manufacturing operations.

"Major changes are needed [for Asustek]," analyst Vincent Chen (陳豊丰) wrote in the report released yesterday.

Reflecting those concerns, the foreign securities brokerage downgraded Asustek to "sell" from "outperform," cutting target prices by 16 percent to NT$72.7 (US$2.28) from its earlier price of NT$115.7.

Asustek's shares continued their worrying slide yesterday, plunging by 6.21 percent to close at NT$80 on the Taiwan Stock Exchange.

"The company is being hindered by weaker desktop PC demand and severe original equipment manufacturing [OEM] competition in the notebook segment," Chen said.

Currently, 42 percent of Asus-tek's revenue is derived from desktop PCs, which include 17 percent from barebones systems -- referring to partially built PCs which generally contain a case, power supply and motherboard -- and 25 percent from motherboards, according to CLSA.

"Asustek is extending its vertical supply chains from motherboard down to barebones-system assembly. We find this strategy is still dragging on margin performance rather than lifting it, because of the lack of strong in-house component synergies," Chen said in the report.

The brokerage also raised concern over Asustek's plan to separate its brand and OEM businesses within two years.

"The progress seems too slow as its PC-centric business model is gradually losing its advantage. On the other hand, rivals Acer and Hon Hai Precision Industry (鴻海精密) have become increasingly tough competitors on the brand and OEM side respectively," the report read.

Asustek has been constrained by its concurrent brand and OEM business model, which caused the company to lose a major notebook account -- Sony Corp last year.

To ease the concerns of its OEM clients, Asustek announced in September last year that it intended to follow in the footsteps of Acer Inc and Wistron Corp (緯創), and spin off the company's OEM operations to allow its emerging brandname business to grow.

Meanwhile, the company is fighting hard to win notebook orders for next year from US giant Dell Inc, despite severe price competition in the industry, according to Chen.

Notebook business accounts for nearly 40 percent of Asustek's revenue.

Amid these problems, Sony and Asustek will both manufacture the first batch of PlayStation 3s (PS3) -- Sony's next-generation game console scheduled to hit the stores in time for Christmas.

However, Chen said that although both notebooks and the PS3 can help rejuvenate revenue momentum, Asustek's margins remain slim.

Asustek announced on May 3 it would pay a cash dividend of NT$1 per share for last year, which translated to a cash payout ratio of 20 percent.

The figure was less than NT$1.5 per share than a year before, when the cash payout ratio was 30 percent.

"Asustek is comparably less aggressive in paying excessive cash back to investors, which has become an important issue. It also disqualifies the stock as a `value play' when earnings growth slows," Chen said in the report.

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