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ANALYSIS: Don't expect electronics upturn soon, analysts say

Investors may not see clear signs of improvement in the electronics sector for some time, as this is traditionally a low season for manufacturers, coupled with concern over the possibility of an economic downturn and uncertainty about the elections, analysts said.

Taiwanese electronics manufacturers have been releasing their latest financial reports over the past few days, with Hon Hai Precision Industry Co (鴻海精密) bucking the trend and posting 11.79 percent month-on-month growth for last month. Its 42.45 percent growth last year also impressed investors.

However, a resurgent Hon Hai was not enough to revive sluggish electronics shares as the benchmark TAIEX hovered around the 8,000 mark.

Hon Hai shares were unchanged at NT$177 yesterday on the Taiwan Stock Exchange, compared with a decline of 0.35 percent in the TAIEX.

"The stock prices have not reflected the companies in this sector that have performed well toward the end of last year for various reasons, first among which is the new labor contract law that came into effect in China this year," said Simon Yang (楊勝帆), director of PC industry research at the Topology Research Institute (拓墣產業研究所).

"Companies with manufacturing plants in China will need at least 30 percent growth again next year just to offset the additional labor costs," he said.

The new labor contract law, effective from Jan. 1, places more emphasis on worker rights, wages and trial periods, and enforces stricter hiring and firing policies.

"It's estimated that the new law will dilute these companies' earnings per share by 3 percent to 5 percent," said Jun Liao (廖景濬), an industry analyst with the Polaris Financial Group (寶來金融集團).

Even before the financial reports were released, investors had been wary of the low-season effect.

Major IC design company MediaTek Inc (聯發科技) reported a 22 percent month-on-month decline in consolidated revenues last month and a quarter-on-quarter decline of 24.06 percent.

MediaTek shares rose 1.46 percent to NT$348 yesterday, continuing a three-day advance.

A new regulation on employee stock bonuses has also caused uncertainty in the market, Liao said.

"The accounting law changes which came into effect this year, making employee bonuses part of operational expenses, may be good for regular stockholders, but investors have yet to decide whether it will be a change for the good in the long run," he said.

Moreover, investors have been weighing their options as election issues take center stage. The legislative elections will have an impact on the market, but for no longer than a day or two, while the presidential election is a much more important factor, industry watchers said.

"The legislative elections won't change other factors such as the new labor law and the economic outlook, at least in the short term, so we do not expect the effects of the legislative elections to last for more than a couple of days," Liao said.

Some investors have been hedging their bets on a Chinese Nationalist Party (KMT) win, and moving funds into China-related stocks and marine shipping stocks, said Sean Ryan Hsiao (蕭文良), an analyst with Fubon Securities Investment Services Co (富邦證券).

"The problems with inventory and sales for upstream IC design and component parts companies have trickled down and affected the downstream companies, which explains the sluggish stock market prices in this sector. It is a problem worldwide and also affects companies like AMD and Intel," he said.

Manufacturers of display panels, notebook computers and LCD TVs are expected to be this year's strong performers.

"Growth was relatively strong in 2007, which means maintaining the same momentum will be difficult in 2008, but we expect panels and notebook computers to have a good year," Liao said.
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