Tue, May 17, 2011 - Page 12 News List

Citigroup expects Hon Hai’s profit margin to improve

Staff Writer, with CNA

Citigroup Global Markets said yesterday it expected Hon Hai Precision Industry Co Ltd’s (鴻海精密) profit margin to improve because of higher prices for its original design manufacturer (ODM) services.

An ODM company provides design and manufacturing services to branded companies.

PRICE INCREASE

In a research note, the brokerage said Hon Hai, the world’s largest contract electronics maker, which makes iPhones and iPads for Apple Inc, has enjoyed a price increase for its services for Apple as rival Quanta Computer (廣達電腦) stopped producing iPads for the US high-tech giant.

The Taiwanese firm is also seeking to raise the prices it charges to Dell Inc and Hewlett-Packard Co for desktop computer production, Citigroup said, adding it believed Hon Hai would raise prices for the two clients.

The comments came after Hon Hai released results over the weekend that showed its operating margin on a consolidated basis fell to 1.7 percent in the first quarter of this year, from 3.7 percent a year earlier, because of higher operating costs.

The 1.7 percent was lower than a previous estimate of 1.8 percent by Citigroup and also lower than consensus estimates of 2 percent.

During the three-month period, Hon Hai’s net profit fell 19.9 percent from a year earlier to NT$14.4 billion (US$500 million), although its sales increased 34 percent during the same period to NT$729.26 billion.

LOSSES

In addition to the price hikes for its ODM services, Hon Hai will benefit from the efforts by its Foxconn International Holdings (FIH, 富士康控股) unit to cut its losses, Citigroup said.

The brokerage said FIH is expected to break even this year after a net loss of US$3 million in the first quarter of this year, a net loss of US$8 million in the fourth quarter of last year and a net loss of US$68 million in the third quarter of last year.

Citigroup said it was maintaining its “buy” recommendation on the stock, with a target price of NT$148.

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