Quanta feels price cut squeeze

Nicholas Negroponte's plan to give laptop computers to 100 million poor children is enriching parts makers more than the principal manufacturer.

Taipei-based Quanta Computer Inc (廣達電腦), the lead contractor on the One Laptop Per Child program, faces more pressure than suppliers ENE Technology Co (迅杰科技) and Simplo Technology Co (新普科技) to keep prices down, said Bevan Yeh (葉獻文), who helps manage US$3 billion at Prudential Securities Investment Trust Co (保德信投信).

The program envisions paying US$100 each for the computers.

"Parts suppliers will enjoy high growth as this initiative reaches a global scale," said Yeh, who is based in Taipei. "Quanta's mission is to make laptops at the lowest possible price, so its profit will not be as rosy."

Yeh bought shares of ENE, a maker of chips used in the computers, and he's considering adding Simplo, which builds batteries for the devices, and Shin Zu Shing Co (新日興), which makes the hinges that attach the screen to the main body. He doesn't own Quanta, the world's largest notebook-computer producer.

The plan by Negroponte, a founder of the Massachusetts Institute of Technology's Media Laboratory, has attracted partnership from companies such as Google Inc, Advanced Micro Devices Inc, eBay Inc and News Corp.

The first shipments are expected in June, Quanta chief financial officer Tim Li (李杜榮) said in an interview on Feb. 16.

Negroponte to begin the program with shipments of 5 million to 10 million laptops, Li added.

Since Quanta won the contract in December 2005, its shares have climbed 2.4 percent, while the benchmark TAIEX index has gained 19 percent.

Shares ENE and Shin Zu Shing have almost doubled since then and are among the top 100 gainers of the stocks traded on the nation's two main exchanges. Simplo has climbed 79 percent and Sunrex Technology Corp (精元電腦), a keyboard maker for the computers, has added 33 percent in the period.

"The program will bring lucrative opportunities for Taiwanese laptop computer component makers and its large scale means high growth potential for these suppliers," said Angela Hsiang (向子慧), an analyst at KGI Securities Co (中信證券).

Quanta oversee production and is free to choose its parts suppliers. It has selected Taiwanese firms with plants in China in a bid to help lower costs, Li said.

The company will book US$10 gross profit for each laptop computer it makes under the charity program, the Chinese-language Commercial Times newspaper reported on Feb. 7, without citing a source. Li said the company's per unit profit will be less than that, though he declined to give a specific number.

Hsiang the program will account for more than 10 percent of profits for Shin Zu Shing and Sunrex. She estimates Sunrex's profit for this year will rise 44 percent and Shin Zu Shing's to increase 55 percent.

"Parts suppliers enjoy higher profit margins and their relatively smaller sizes will allow their shares to outperform Quanta," Hsiang said.

Of the 17 analysts who cover Quanta, just four recommend investors buy the shares, according to Bloomberg data.

"The program will mean a bigger deal for component suppliers," said Kirk Yang (楊應超), a Hong Kong-based technology analyst at Citigroup Inc.

Simplo, Sunrex and Quanta are traded at about 14 times estimated earnings, according to Bloomberg data. Companies in the TAIEX on average fetch 21 times earnings.