Merrill Lynch said on Saturday that it has cut its target price on shares of IC designer MediaTek Inc (聯發科) to NT$271 from NT$570 amid fears that fierce competition will further hurt its bottom line.
In a research note, the brokerage said it has also downgraded its recommendation on the stock to an “under-performing” rating from an earlier “buy” rating.
Merrill Lynch said that because of the impact of price competition, MediaTek is expected to suffer further declines in its gross margin and average selling prices.
While MediaTek’s chips based on an Android solution remain impressive in the market, “we are now increasingly aware that MediaTek lacks high-volume branded customers to drive demand in the China or India markets,” the brokerage said.
As a result, its rivals are expected to seize the opportunity to make inroads or play catch-up in that particular field, it said.
Merrill Lynch said it has cut its forecast for MediaTek’s earnings per share (EPS) for this year by 41 percent to NT$19.37 and has lowered its estimate for the company’s EPS next year by 42.3 percent to NT$26.68.
Escalation of competition in the cellphone chip market in China, which has served as the major revenue source for MediaTek, has had a great impact on the company’s gross margin.
In the fourth quarter of last year, MediaTek’s gross margin fell three percentage points from the third quarter to 49.2 percent.
In the same period the company recorded net income of NT$3.83 billion (US$131.3 million), down 45.1 percent from the previous quarter.