Citigroup likes Hon Hai’s purchase of set-top box plant

By Kevin Chen  /  Staff Reporter

Wed, Jul 20, 2011 - Page 11

Hon Hai Precision Industry Co’s (鴻海精密) purchase of Cisco Systems Inc’s set-top box plant in Juarez, Mexico, would guarantee it more networking solutions orders and higher operating margins, Citigroup said yesterday.

Despite the news of the purchase of the set-top box facility, shares of the Tucheng District (土城), New Taipei City (新北市)-based company were little changed in Taipei trading yesterday, rising 0.68 percent to NT$89.1. The stock has fallen 29.57 percent from this year’s session high of NT$126.5 in February.

“We note that networking business has long been one of the most profitable businesses within Hon Hai, so the Cisco acquisition should also help 2012 margin,” Citigroup Global Markets analyst Kevin Chang (張凱偉) said in a note.

On Monday, Cisco announced it was selling its Juarez facility to Foxconn Technology Group (富士康集團) — also known as Hon Hai in Taiwan — as part of the US company’s effort to streamline its operations, according to a statement posted on its Web site.

Hon Hai confirmed the deal in a filing sent to the Taiwan Stock Exchange yesterday, saying that it had purchased the Juarez plant from Cisco System’s subsidiary Scientific-Atlanta LLC through a Hon Hai subsidiary, PCE Paragon Solutions Kft.

“Through this strategic alignment with Cisco, we will be able to leverage the operation’s unrivalled talent, technology and expertise in video and telco infrastructure to broaden our end-to-end vertical supply chain services in the video, broadband, networking, and telecommunications infrastructure sectors,” Michael Ling (凌志平), general manager of Foxconn’s Communication and Network Solutions Business Group (CNSBG), said in a statement.

The transaction is subject to regulatory approvals and was expected to close by October, Hon Hai said, without providing financial details of the transaction because of confidentiality agreements.

Citigroup said the pricing should be “favorable” to Hon Hai because Cisco is facing more pressure than at any point to restructure its business.

Chang said in his note that “CNSBG has long been one of the most profitable and margin-focused entities in Hon Hai.”

The move to tap into set-top boxes is in line with Hon Hai chairman Terry Gou’s (郭台銘) aim to diversify the firm’s product portfolio and maintain growth momentum following its purchases of a PC factory in Poland from Dell Inc in December 2009, a TV plant in Mexico from Sony Corp in September 2009, another Sony TV plant in Slovakia in April last year and the winning of Apple Inc’s iPhone and iPad orders.

“What these deals have in common, with the exception of iPad, is that Hon Hai will make much higher operating margin (likely at 4 percent) than corporate average business,” Chang wrote in the note.

Citigroup forecast Hon Hai’s operating margin will climb to more than 3 percent next year, allowing it to deliver earnings per share of between NT$12 and NT$13.