Mon, Feb 28, 2011 - Page 12 News List

Hon Hai hit by margin downside

By Kevin Chen  /  Staff reporter

Hon Hai Precision Industry Co (鴻海精密) could see its shares drift in range-bound trading in the short term owing to potential margin downside, after the stock was hit by speculation last week of a shipment delay of Apple Inc’s new iPad model, analysts said.

Shares of Hon Hai closed at NT$109 in Friday trading, the lowest level since Dec. 2. For the week, the stock has dropped 6.44 percent, underperforming the TAIEX’s 2.76 percent fall, the Taiwan Stock Exchange’s data showed.

The stock was offloaded by investors last week after a Yuanta Securities Co (元大證券) report said iPad 2 shipments might be postponed to June from April owing to Apple’s sudden design changes and production bottlenecks at Hon Hai.

Goldman Sachs (Asia) LLC, said on Friday that based on its checks with industry and supply chain sources, Hon Hai encountered “some iPad 2 yield issues” in product assembly, particularly in its handling of the new Apple -tablet’s ultra-slim cover glass, the US brokerage said in a client note.

According to another supply chain check by Primasia Securities Co, Apple’s new design for iPad 2 focuses on making both the cover glass and touch sensor slimmer, reducing the thickness of cover glass from 0.6mm to 0.5mm and that of the touch sensors from 0.5mm to 0.4mm.

“The thinner requirements significantly lower yield rates for some suppliers and assemblers like Hon Hai,” the Taipei-based Primasia said in a report on Wednesday.

However, HSBC Securities (Taiwan) Corp Ltd maintained that Hon Hai’s iPad 2 production was normal.

“This news is likely to be more noise than fact … There is no production glitch being reported so far,” analysts Jenny Lai (賴惠娟) and Carrie Liu wrote in a report on Wednesday.

Any possible production bottlenecks would soon be resolved, analysts said.

“What could cap Hon Hai share price upside is the potential downside in fourth-quarter and first-quarter operating margin,” Goldman Sachs analysts Henry King (金文衡) and Kevin Lu wrote in the note.

That is because Hon Hai faces increased operating expenses in the sales and marketing of new products, in addition to warranty costs it bears for its customers in the second quarter, they said.

The unease over Hon Hai’s operating margin problem is likely to keep buying of the stock in check until the second quarter, limiting its share price to be range-bound ahead of the release of fourth-quarter and first quarter results, they added.

Apple is scheduled to introduce the new iPad at a product-launch event in San Francisco on Wednesday. It has yet to know if the US company will clarify the shipment delay speculation then, but for Hon Hai, its shares have dropped 7.23 percent so far this year and down 13.83 percent from Feb. 8, when it posted an intraday high of NT$126.5, according to the exchange’s data.

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