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Analysis: BenQ's restructuring plan fails to impress investors

A recent restructuring plan unveiled by BenQ Corp (明基) could be seen as a desperate attempt by the world's No. 6 handset maker to turn itself around after acquiring Siemens AG's unprofitable mobile phone unit last year.

However, there do not seem to be any quick fixes.

Foreign investors cast a vote of no-confidence in the new restructuring plan -- which included the announcement that it would take the company a year longer than expected to break even -- by selling 1.14 million BenQ shares last Friday, one day after the company said it planned to spin off its original-design-manufacturing (ODM) business early next year.

The sell-off reduced foreign investors' holding in BenQ to 20.35 percent from 28.4 percent last October, when the merger took effect. Overseas fund managers currently hold an average 30 percent stake in local technology firms.

"While spinning off its [ODM] business seems to be the right thing to do, it's not going to solve BenQ's problem," said Kevin Chang (張凱偉), who tracks the handset industry for JP Morgan Securities, in a report released on Monday.

Even if BenQ could increase profits from the manufacturing unit to heyday levels, that would not be sufficient to cover the company's losses in a single quarter, Chang said.

Losses

BenQ announced its latest restructuring plan after posting a third consecutive loss in the second quarter, bringing total losses to NT13.52 billion (US$411.19 million) over the past nine months.

Growing concern about competition from ODM customers is forcing BenQ to spin off its ODM unit earlier than it had originally planned, but the move should provide a new catalyst for growth, BenQ chairman Lee Kun-yao (李焜耀) told investors.

It is becoming increasingly difficult to compete simultaneously in both the branded and ODM sectors, especially in the TV market, Lee said.

"At this crucial moment, I don't think it is a priority for BenQ to divide its brand and ODM businesses. The restructuring plan will not help BenQ to break even any earlier," said Helen Chen (陳佩君), an analyst with Polaris Securities Co (寶來證券).

For its mobile phone unit to break even, BenQ would need to cut costs and increase its gross margin and average selling price to levels similar to its rivals, rather than spinning off a manufacturing unit, analysts said.

In addition, shipments would need to increase significantly, they added.

These targets would be tough for BenQ to meet in a short term. To turn things around, BenQ would need to generate more cash flow to finance the development and marketing of new mobile phones.

"The spin off of the ODM unit could attract more orders for BenQ and generate much-needed cash for the company," Chen said.

BenQ posted revenues of NT$8.91 billion in the second quarter, compared with an operating loss of NT$9.3 billion in the same period.

The mobile phone maker's shareholders approved a proposal to raise funds by issuing NT$10 billion worth of bonds and special shares worth NT$15 billion later this year.

Lee, 53, was the mastermind behind the launch of the BenQ brand more than four years ago. At the time, market watchers expressed doubt that BenQ could manufacture its own brand-name products without hurting its ODM business.

Following the examples of world-famous Asian electronics companies such as Sony Corp and Samsung Electronics Co, Lee has ambitions to turn BenQ into a household name, while continuing to manufacture electronics for other brands.

Tough task

However, achieving that goal has turned out to be tougher than Lee ever imagined.

"Recently, some of our overseas customers -- especially in LCD TVs and monitors -- expressed serious concerns about a possible conflict of interest. They hope we can split the two units," Lee said.

The separation would boost growth and efficiency for its brand and ODM businesses in the future, Lee said.

Apart from mobile phones, BenQ also makes own-brand projectors, computers and LCD TVs, and manufactures computer monitors and slim-screen TVs for other companies.

Chang yesterday cut JP Morgan's target price for BenQ shares by 72 percent from NT$24 to NT$6.5 for the next 12 months, implying a downside of 61 percent.

"We advise investors to cut their losses on BenQ holdings," Chang said.

Chang said BenQ would not be able to break even in the foreseeable future, citing stiff competition from rivals Nokia Oyj and Motorola Inc, which could be the main reason behind 150-year-old Siemens' backing out of the mobile phone industry.

Macquarie analyst Dominic Grant said that BenQ would not break even until 2008, but although challenges remain, he believed the restructuring signalled a new sense of urgency from a company which was determined to stem losses.

Bucking the trend, Grant upgraded BenQ from "under-perform" to "out-perform" on Monday, saying the worst could be over. But He lowered his target price from NT$23.2 to NT$22.34.

JP Morgan and Macquarie both expected BenQ to cut employee numbers by the end of the year.

BenQ said last week that it hoped to cut costs by 600 million euros (US$767.4 million), up from a previous estimate of 500 million euros.
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