Sat, Jan 10, 2009 - Page 12 News List

Analysts concerned by across-board margin erosion

SILVER LINING A report by financial services firm Citigroup said HTC Corp and Acer Inc would see the least margin erosion among Taiwanese companies in the hardware sector

By Kevin Chen  /  STAFF REPORTER

Citigroup again lowered its target price for Asustek Computer Inc (華碩電腦) after the Taiwanese company revised downward its fourth-quarter guidance on Thursday night. But what has caused grave concern among analysts is margin erosion across the board within Taiwan’s hardware sector.

The fair price for Asustek over the next 12 months is now set at NT$24 by Citigroup, down from its previous estimate of NT$28, Citigroup Global Markets analyst Eve Jung (戎宜蘋) said in a client note yesterday.

On Monday, the Taipei-based analyst cut her target price for Asustek to NT$28 from NT$50 and downgraded her rating on the stock to “sell” from “buy.”

This was because of concerns about the company’s likely disappointing earnings for the fourth quarter of last year and the first quarter of this year.


Asustek is not the only hardware manufacturer in Taiwan that will have to wait until the second half of the year to see improvements in operating margin, Citigroup said in a separate report yesterday.

“Investors are fully prepared to see severe margin erosion or even operating loss for the semiconductor sector but seem to ignore the possibility of meaningful margin erosion for the hardware [sector],” Citigroup analyst Kevin Chang (張凱偉) wrote in the report.

“We expect more negative earnings surprises in the hardware sector than in the semiconductor sector in the first quarter of 2009,” he wrote.

Hon Hai Precision Industry Co (鴻海精密), the nation’s biggest maker of electronics components, and most handset component companies could face big margin impact in the first quarter because of the plunge in factory utilization, Chang wrote.


“Within the hardware sector, we believe handset companies could see more margin downside than notebook companies given their sharper revenue decline,” Chang wrote in the report.

The report — which is co-authored by Jung and Andrew Lu (陸行之) — said HTC Corp (宏達電), the world’s biggest maker of cellphones running on Microsoft Inc’s system and Acer Inc (宏碁), the world’s third-largest personal computer vendor, are two companies that will see the least margin erosion.

Citigroup attributed HTC’s advantage to its low fixed costs and Acer’s to its lack of direct labor costs.

Indeed, Acer announced late yesterday evening that its operating margin would meet its fourth-quarter guidance despite lower revenue.

The PC vendor said in a statement that its fourth-quarter operating margin is expected to be “better or similar to” the third-quarter level.

However, the company’s consolidated revenue would see a negative growth of between 5 percent and 10 percent from the previous quarter, because of the weaker-than-expected overall market situation, Acer said.


“In the current worldwide economic situation, even though most of the channels have been more cautious and less willing to carry inventory by year-end, Acer’s product demand has remained healthy and stable,” Acer said in the statement.

Compared with other contract notebook makers, Quanta Computer Inc (廣達電腦) and Compal Electronics Inc (仁寶電腦) will also see less severe margin erosion because of their lower fixed costs, the Citigroup report said.

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