Mon, Aug 20, 2007 - Page 12 News List

Subprime crisis could affect EPS

FELLING THE EFFECT Firms that depend on the US market for a lion's share of their sales could see a worst-case scenario in which earnings per share decline 10 percent

By Jason Tan  /  STAFF REPORTER

If the subprime mortgage crisis in the US weighs heavily on corporations and consumer sentiment in that country, Taiwanese technology firms' earnings per share (EPS) could decline by as much as 10 percent, a report said last week.

"Assuming a 10 percent reduction in US corporate sales and a 30 percent reduction in consumer sales next year, we found that Wistron Corp (緯創) and Foxconn Technology Co (鴻準精密) would have the biggest exposure, resulting in a 6 percent EPS decline," a report from Citigroup Research said.

The report was based on a sensitivity analysis of the US consumer and the corporate exposure of key Taiwanese tech firms.

"Although we have not seen any US consumer spending slowdown, there is a concern due to the subprime mortgage issue," Kirk Yang (楊應超) wrote in the report released on Friday.

Thirty percent of sales recorded by Foxconn Technology, an original design manufacturer for clients such as Apple Inc, are made in the US. Europe and Asia each contribute 25 percent of the firm's sales.

Foxconn Technology shares closed at NT$282 on Friday on the Taiwan Stock Exchange. The stock has declined 29.68 percent in the past month, having traded at NT$401 on July 20.

The company is expected to see net income of NT$14.65 billion (NT$444 million), or NT$18.68 per share, with sales of NT$167 billion this year, Yang forecast in the report.

Wistron, a top-tier notebook computer maker, derives 29 percent of its sales from the US, with Europe and Asia accounting for 28 percent and 27 percent respectively.

The company's shares have fallen 19.33 percent in the past month to close at NT$52.6 on Friday. Citigroup expects the company to post income of NT$6.7 billion, or an EPS of NT$4.87, with total revenues equaling NT$279.9 billion this year.

However, high-tech manufacturers such as Asustek Computer Inc (華碩電腦) and Lite-On Technology Corp (光寶科技) -- which generate most of their revenue in Europe -- are likely to incur only a 4 percent EPS downside.

"The bottom line is that we don't expect more than 10 percent EPS downside in the worst case," Yang said.

Shares of Asustek have declined by 17.44 percent since closing at NT$101.5 on July 20, settling at NT$83.8 last Friday.

Lite-On was down 20 percent to NT$46 on Friday.

In the light of recent market volatility, the Citigroup researcher said investors would stick with high-quality names with strong earning growth, prioritizing firms less likely to be affected by weaker US spending power.

Citigroup's top picks are Hon Hai Precision Industry Co (鴻海精密), Micro-Star International Co (微星科技), Acer Inc, Asustek and Lenovo Group Ltd (聯想), listed in Hong Kong.

Hon Hai shares declined 14.88 percent since July 20 to close at NT$246 last Friday, while Micro-Star shares were down by 12.34 percent to NT$33.7.

Lehman Brothers, which issued its latest report on Taiwan's high-tech industry on Friday, said it didn't expect the rising credit risk in the US to present a significant threat to overall PC demand.

Instead, it said the main driver of new PC growth was the emerging markets, which will likely account for 44 percent of demand this year, compared to 33 percent in 2002.

"Our channel checks show that Taiwan foundries' PC customers are showing the strongest demand of all sectors. We believe that PC unit shipment growth is mainly from emerging markets, which are less vulnerable to the risk of slowing consumer demand, in our view," Lehman Brothers said in the report.

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