Investment plan shows Hon Hai's tactics: analysts

Proposed investment in Advanced Optoelectronic Technology Inc (先進開發光電) by Hon Hai Precision Industry Co (鴻海精密) reflects the latter's strategy of increasing the vertical integration of its light-emitting diode (LED) business, analysts said yesterday.

"Hon Hai now owns Foxsemicon Integrated Technology Inc (沛鑫半導體) for its LED systems, Foxconn Technology Co (鴻準精密) for its thermal modules and [will own a stake in] Advanced for its LED packaging," Dale Gai, of Citigroup Research, said in a note.

With connections in the mid and downstream supply chain secured, Hon Hai should acquire LED upstream makers soon, the note said.

Shares of Advanced Optoelectronic gained 32 percent to NT$94 (US$2.90) on the GRETAI Securities Market, while Hon Hai shares dropped 2.3 percent to NT$277.5 on the Taiwan Stock Exchange.

Citigroup's note came after Hon Hai said on Tuesday night in a stock exchange filing that it would acquire a 19.9 percent stake in Advanced Optoelectronic, an LED downstream packager.

Hon Hai plans to invest in Advanced Optoelectronic through its investment units, Transworld Holdings Ltd and Bao Shin International Investment Co (寶鑫國際投資), in a private placement that is set to be completed by Aug. 1, Hon Hai said in the filing.

The world's largest contract electronics part maker said it would spend NT$360 million (US$11 million), or NT$10 apiece, in the private share sale.

"Growth for Hon Hai in the LED industry is feasible judging by its solid relationship with the Chinese government, whose energy policy favors LED street lights," Gai said in the note.

Hon Hai will supply LED street light solutions to a mid-sized city in northern China, likely boosting Foxconn's earnings next year, the note said.

Lu Chia-lin (呂家霖), an analyst at Yuanta Core Pacific Securities (元大京華證券), agreed yesterday that the new investment was a positive step, because LEDs are emerging as a key component for the technology sector. Moreover, the focus on LED lighting "targets the general lighting sector and not necessarily just consumer electronics," he told Reuters.

Listed since 2005, Hsinchu-based Advanced Optoelectronic posted a 1.43 percent decline in sales for the first six months to NT$995 million.

Its revenues last year declined 33 percent to NT$1.86 billion after a lawsuit filed by Nichia Corp caused a loss of orders from South Korean customers.

In related news, the Chinese-language Commercial Times yesterday mistakenly reported that Hon Hai had invested in Ability Opto-electronics Technology Co (先進光電), whose name in Chinese is similar to that of Advanced Optoelectronic.

This caused shares of Ability to rise nearly the 7 percent daily limit to NT$21.90.