Thu, May 16, 2013 - Page 13 News List

Hon Hai shares fall on operating margin in Q1

OPTIMISM:Daiwa Capital Markets and Deutsche Bank say they expect the firm’s earnings recovery to pick up momentum in the second half of the year

By Lisa Wang  /  Staff reporter

Hon Hai Precision Industry Co Ltd (鴻海精密) shares tumbled 1.26 percent yesterday after the company on Tuesday reported a disappointing first-quarter operating margin.

The firm’s operating margin fell 200 basis points to 1.72 percent last quarter from the previous quarter, which Hon Hai attributed to a lower factory utilization rate caused by weaker-than-expected demand for Apple Inc’s iPhones.

Shares of the major maker of iPhones and iPads declined for the fourth straight day to NT$78.2, underperforming the TAIEX, which gained 0.81 percent.

On Tuesday, the firm said its net profit fell 56 percent to NT$16.35 billion (US$544 million), or NT$1.38 per share, in the first quarter, compared with net profit of NT$36.9 billion, or NT$3.13 a share, in the fourth quarter of last year.

Last quarter’s figure increased 2.9 percent from net profit of NT$15.89 billion in the same period of last year, due to new accounting rules, it said in a filing to the Taiwan Stock Exchange.

Daiwa Capital Markets analyst Birdy Lu (呂家霖), who forecast Hon Hai would report net profit of NT$16.8 billion, or NT$1.52 per share, last quarter, yesterday said foreign exchange gains helped boost the firm’s bottom line.

However, its operating profits plummeted about 67 percent sequentially to NT$13.91 billion last quarter, which was less than Lu’s forecast of NT$17.82 billion. Its 1.72 percent operating margin also fell short of Lu’s estimate of 2.2 percent.

Meanwhile, Hon Hai’s gross margin fell 390 basis points last quarter to 5.68 percent from a quarter ago, lower than Lu’s 8.4 percent forecast, because of the impact of new accounting rules and low capacity utilization.

“We reached Hon Hai for a brief chat. Hon Hai commented that the implementation of IFRS [accounting rule] caused about 2 percentage points decline in gross margin, and the rest is due to low capacity utilization,” Lu said in a research note.

He said he was still confident that Hon Hai would see a drastic pickup in the second half of the year, along with further improvement in its operating margin because of better operation efficiency and a larger production scale, thanks to Apple’s introduction of new iPhones and iPads, as well as a mild recovery in Hon Hai’s non-Apple businesses.

Hon Hai’s revenue is likely to slide by between 3 percent and 5 percent this quarter from last quarter’s NT$809 billion, but may grow 47 percent in the second half from the first half, he said.

Hon Hai’s first quarter results and its likely limited improvement in its operating margin in the second quarter also led Deutsche Bank analyst Ivy Lee (李怡璿) to adjust downward her earnings per share forecast to NT$7.9 this year from the previous NT$8.4 estimate.

“Our new model estimates that Hon Hai’s sales will decline by 5 percent quarter-on-quarter in the second quarter, with 2.1 percent operating margin, up 40 basis points from last quarter,” Lee said in a note.

Deutsche Bank said it was also optimistic about Hon Hai’s earnings recovery momentum, expecting its operating margin to rise to 3.7 percent in the second half of the year.

Both Daiwa and Deutsche offered a “buy” rating on Hon Hai’s shares, with a target price of NT$112 set by the former and NT$105 by the latter.

Additional reporting by Kevin Chen

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