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Brokerages downgrade Largan after Q4 forecast

Largan Precision Co (大立光) saw its equity recommendation downgraded yesterday to “sell” from “hold” at Citigroup after it announced on Wednesday a poor forecast for sales for this quarter.

The nation’s leading maker of camera and handset lenses also saw its stock downgraded to “neutral” from “buy” at Goldman Sachs, to “underperform” at Merrill Lynch, and had its earrings estimates for this year cut by SinoPac Securities Corp (永豐金證券), the brokerages said in investment notes issued yesterday.

In a filing to the Taiwan Stock Exchange on Wednesday night, Largan said fourth-quarter revenue would drop between 15 percent and 25 percent from its third-quarter level after weaker-than-expected customer demand for the October-December period.

At a teleconference on Oct. 21, company chairman Scott Lin (林耀英) told investors and analysts that Largan expected a “flat” performance in revenue for the current quarter compared with the previous quarter’s NT$2.159 billion (US$64.9 million).

Largan’s revision surprised the market because it had reported record sales of NT$808 million last month.

However, as all major handset vendors have lowered their forecasts for next year — including Nokia’s revision of its fourth-quarter shipment forecast from 351 million units to 330 million units — and expect weakened shipments industry-wide next year, Citigroup said Largan’s announcement should meet market expectations.

“Order cuts in Taiwan are a matter of ‘when,’ not ‘if,’” Citigroup Global Markets analyst Kevin Chang (張凱偉) wrote in a client note yesterday.

Indeed, the woes of Largan Precision have partly reflected how severe market concern is. The Taichung-based company’s shares have fallen by half this year and closed at NT$215 yesterday.

Largen ended 2.27 percent lower in trading yesterday, underperforming a 4.26-percent increase on the benchmark TAIEX.

Based on its 15 percent to 25 percent downward adjustment announced on Wednesday, Largan is likely to see its revenue fall to between NT$16.19 billion and NT$18.35 billion in the current quarter.

In line with this revision, Citigroup predicted a monthly decline of 25 percent in Largan’s sales this month and another 50 percent monthly drop next month.

“As such, Largan’s utilization rate could drop well below 50 percent in December,” Chang wrote.

“Given the sharp decline of the utilization rate, we are concerned that Largan could see meaningful margin pressure in the first half of 2009,” Chang wrote.

Citigroup lowered its target price for Largan from NT$310 to NT$180.

SinoPac predicted Largan’s fourth-quarter earnings per share (EPS) would drop to NT$3.84 from NT$9.09 in the third quarter on a lower utilization rate and potentially weak Christmas shopping demand.

It also trimmed the firm’s earnings for this year to NT$22.58 per share from its previous estimate of NT$25.06, and predicted a 9 percent drop year-on-year in revenue next year to NT$7.42 billion, with the gross margin sliding to 49.8 percent and earnings per share falling to NT$18.3.
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