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Hon Hai second quarter profits below estimates

Hon Hai Precision Industry Co (鴻海精密), the world's largest contract maker of electronics including the iPhone, reported a second-quarter profit that missed analysts' estimates as margins were hurt by higher material costs.

Net income rose 18 percent to NT$15.6 billion (US$472 million), according to Bloomberg calculations. Sales jumped 37 percent to NT$264.6 billion.

Chairman Terry Gou (郭台銘) boosted sales by attracting customers such as Apple Inc to outsource the making of music players and mobile phones to Hon Hai. The company, which said earlier this week it plans to invest US$5 billion over the next five years in Vietnam, reported late yesterday that profitability slipped.

"Rising materials costs hurt profit even as sales rose because metal prices have been rising," said Calvin Huang (黃文堯), who rates Hon Hai a "buy" in coverage for BNP Paribas Securities in Taipei. "They also spent a lot of money on research for new products such as the iPhone."

Shares of Hon Hai declined 0.8 percent to NT$245 at the close in Taipei, compared with a 2.41 percent gain in the TAIEX. The stock has gained 58 percent in the past year, compared with a 36 percent advance in the benchmark index, after it garnered contracts to make Apple's iPhone and Nintendo Co's top-selling Wii game console.

Hon Hai's gross profit fell to 5.07 percent in the second quarter from 5.55 percent a year earlier, according to Bloomberg calculations based on company filings to the stock exchange. The company doesn't provide second-quarter numbers.

"Revenue from mobile phones and game consoles both had high growth," Hon Hai spokesman Edmund Ding (丁祈安) said yesterday. "We are confident to continue to have a 30 percent or more increase in sales in the future."

He declined to give specific forecasts.

The second-quarter numbers were derived by deducting first- quarter earnings from first-half results announced late yesterday. Ding said he couldn't confirm the derived second-quarter numbers.

Since starting Hon Hai in 1974, Gou has built the company by offering lower prices and spending on product development. Hon Hai, now worth US$46 billion, took over Singapore-based Flextronics International Ltd as the world's biggest contract maker of electronics in 2005 and makes Sony Corp televisions, Apple iPods and iPhones, and computers for Hewlett-Packard Co and Dell Inc.

Cupertino, California-based Apple started selling iPhones in June, while Kyoto, Japan-based Nintendo introduced the Wii game consoles last November. Hon Hai's main business is making parts for personal computers, mobile phones, and consumer electronics products. It also provides assembly services.

Hon Hai doesn't disclose its customers or hold investor briefings. A filing with the US Federal Communications Commission shows the company is the maker of the Wii, while Apple has previously said that Foxconn Technology Group (富士康集團), controlled by Hon Hai, is a key supplier of iPod music players.

The company also derives earnings from its affiliates, including Miaoli-based Innolux Display Corp (群創光電), the world's second-largest flat-screen computer monitor maker behind TPV Technology Ltd (冠捷科技), and Hong Kong-based Foxconn International Holdings Ltd (富士康控股), the world's largest contract handset manufacturer.

Innolux posted record monthly sales of NT$13 billion and profit of NT$1.19 billion for May, the company said in a July 4 exchange filing, exceeding profit for the entire first quarter.
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