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HSBC joins JPMorgan in downgrade of Hon Hai

HSBC Securities Corp downgraded Hon Hai Precision Industry Co (鴻海精密), one of the nation’s biggest electronics makers, to “neutral” and said that global economic weakness may cut into the company’s growth this year and next.

The move comes as electronics makers expect shipments to fall or grow only slightly next year amid a worsening global economy. Hon Hai was likely to emulate the “overall global tech sales mix,” according to the HSBC report, which was released on Monday.

“It is difficult for Hon Hai to achieve growth rates higher than the industry average, even through acquisitions [as it did before],” said Wang Wanli (王萬里), an analyst at HSBC Securities (Taiwan) Corp Ltd.

Wang predicted that next year Hon Hai would post only 6.7 percent annual growth in revenues to NT$2.11 trillion (US$63.8 billion), lower than an estimated 16 percent for this year and much lower than the 25 percent to 30 percent average achieved between 2000 and 2006.

“Similar to other hardware companies, [Hon Hai’s] earnings peaked in the third quarter of 2008 and no catalysts are visible in the next two quarters,” Wang said.

HSBC also slashed its earnings forecast for the electronics company by 5.4 percent and 23.5 percent for this year and next year on growing concern over the macro economy and despite Hon Hai’s third-quarter earnings beating the expectations of most analysts.

Reflecting concern at diminishing growth momentum, Wang lowered the rating for Hon Hai to “neutral” from “overweight,” joining JPMorgan’s downgrade.

“We do not recommend investors go bargain hunting because there are limited catalysts,” Wang said.

He sharply trimmed the target price for Hon Hai to NT$70.7 from the previous NT$186.

Shares of Hon Hai fell 6.89 percent to NT$56.8 yesterday.

However, investment banks Citigroup and Yuanta Securities Co (元大證券) maintained a “buy” rating for Hon Hai.

“We have a Buy/Medium Risk on Hon Hai shares as we expect Hon Hai’s strong earnings growth recovery will lead to a valuation re-rating,” Citigroup analyst Kevin Chang (張凱偉) said in a report on Monday. “It’s too early to write off the company and [we] believe Hon Hai will stage a big comeback after it streamlines its capacity and workforce by the end of 2009.”

But Chang cut his forecast for Hon Hai’s earnings next year by 7 percent.
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