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Citigroup cautious on handset makers amid falling orders

As a result of declining orders from global handset vendors, Citigroup is cautious on the outlook for local mobile phone makers, which, along with components suppliers, could face severe margin pressure, it said in a client note last week.

Citigroup said vendors were cutting orders for components based on a study it released on the drop in the period between when vendors place orders and when they actually need the products.

“We take a very cautious view on November sales and expect a sharp decline in December revenue” for local handset makers and component suppliers, Kevin Chang (張凱偉), a Citi Investment Research analyst, wrote in the client note released on Thursday.

Citigroup said it preferred companies with a multi-year growth momentum and substantial potential for market share gain, adding that it remained positive on smartphone maker HTC Corp (宏達電) and Silitech Technology Co (閎暉實業), which makes keypads, lenses and magnesium-alloy casing for cellphones.

“We maintain our ‘buy’ [rating] on HTC, driven by its secular growth trend and rate Silitech a ‘buy’ for its substantial share gain from Nokia and Research in Motion,” Chang wrote.

Chang said he was confident that HTC would achieve its fourth-quarter revenue projection of NT$48 billion (US$1.46 billion).

He said HTC’s stock had been severely undervalued and presented an opportunity for investors. Citigroup offered a price objective of NT$520 for shares of HTC, which closed at NT$392.00 on the Taiwan Stock Exchange on Friday. Silitech ended at NT$74.50.

On the other hand, Citigroup said it was negative on Merry Electronics Co (美律實業), a maker of phone receivers and microphones, and Compal Communications Inc (華寶), a smartphone maker with Palm and Motorola as its key customers.

It kept “sell” ratings on both stocks.

Merry and Compal Communications closed at NT$34.10 and NT$25.00 on Friday respectively.

The US brokerage is pessimistic on Foxconn International Holdings (FIH, 富士康), saying the chances that its earnings would recover in the next year to 18 months were slim given market share and operational problems.
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