Tue, Sep 04, 2012 - Page 14 News List

Hon Hai stocks surge as gross margin increases

LOOKING UP:Analysts expect iPhone 5 shipments and a better deal on its investment in Sharp to lift Hon Hai’s earnings and prospects for the rest of the year

By Kevin Chen  /  Staff reporter

Hon Hai Precision Industry Co (鴻海精密) saw its stock rise 6.13 percent yesterday after the company reported stronger-than-expected second-quarter earnings.

Shortly after the stock market opened, Hon Hai shares rose limit-up to NT$90.70, buoyed by the company’s report on Friday night showing an improvement in its gross margin and a lower-than-expected unrealized loss on its Sharp investment.

At the end of Taipei trading, Hon Hai closed at NT$90, with 105.8 million shares changing hands, compared with its turnover of 39.6 million shares on Friday, Taiwan Stock Exchange data showed.

To date this year, the stock has risen 8.56 percent, outperforming the TAIEX’s 5.35 percent increase.

In the April-to-June quarter, Hon Hai’s consolidated net income fell 15.48 percent quarter-on-quarter and 2.87 percent year-on-year to NT$12.61 billion, or earnings per share of NT$1.06, according to the company’s financial statement.

However, gross margin climbed to 7.93 percent from 7.28 the year before and 6.64 percent a quarter earlier; operating margin also rose to 2.41 percent from 2.01 percent last year and 1.52 percent the previous quarter, the company reported.

“Hon Hai’s second-quarter gross margin and operating margin beat our expectations,” Fubon Securities Investment Services Co (富邦投顧) analyst Arthur Liao (廖顯毅) said yesterday, adding that was likely due to subsidies from key customer Apple to help Hon Hai cover rising wages in China.

In a note to clients, Liao said he was encouraged by the company’s strong second-quarter results and had raised his forecast for Hon Hai’s gross and operating margins this year to 7.3 percent and 2.3 percent respectively, from 7 percent and 2 percent.

According to Liao’s company checks, Hon Hai will ship the first batch of next-generation iPhone from its Zhengzhou plant in China this week.

“We project that the iPhone 5, for which Hon Hai is the major supplier, will bring upside to average selling prices and margins in the second half of 2012,” Liao said in a note.

Hon Hai’s operating margin also beat Barclays Capital’s estimate, with hardware and components research head Kirk Yang (楊應超) saying in a report issued over the weekend that the firm’s weak operating margin in the first quarter was therefore a one-time event.

Yang now expects Hon Hai’s operating margin to further improve in the third quarter and post a big increase in the fourth quarter with iPhone 5 shipments.

Both Liao and Yang said Hon Hai NT$4.5 billion paper loss over the Sharp investment was not expected to have a substantial impact on its bottom line, adding that this investment write-down could be reversed in the company’s third-quarter financial reports after re-negotiations with Sharp, Japan’s biggest LCD maker.

Fubon has an “add” rating on Hon Hai and lifted its price target to NT$107 from NT$97, while Barclays maintained its “overweight” rating with a price target of NT$113.

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