Analysts bullish on outlook for Hon Hai

By Lisa Wang  /  Staff reporter

Fri, Jun 28, 2013 - Page 14

Hon Hai Precision Industry Co Ltd (鴻海精密) shares yesterday held steady at a two-week high after analysts raised their earnings forecast for the firm this year, taking a cue from chairman Terry Gou’s (郭台銘) bullish forecast.

On Wednesday, Gou said Hon Hai, the major assembler of Apple Inc’s iPhones and iPads, would grow its earnings this year to surpass last year’s record level of NT$8.03 per share.

Gou’s comments slightly alleviated investors’ concerns about an adverse impact from weak demand for iPhones and a loss of Apple orders to local rival Pegatron Corp (和碩).

Still, investors did not respond well to the company’s plan to spin off its connector business, which accounts for 2 percent of Hon Hai’s overall revenue.

“This [Gou’s earnings forecast] is a positive surprise to the market,” Citigroup Global Markets Inc analyst Kevin Chang (張凱偉) said in a note yesterday. “Most investors expected a lower number, which is why the stock has performed so poorly this year.”

Since the beginning of this year, Hon Hai shares have fallen 17.7 percent, underperforming the TAIEX, which has gained 1.35 percent over the same period.

Chang said he believes that Gou’s optimism is based on the company’s expectation of a big jump in iPhone sales in the second half of the year.

“Moreover, we reckon that the market may have been overly bearish on Hon Hai’s allocation of [the] low-cost iPhone,” he said, adding that Hon Hai would produce half of the low-cost iPhones, rather than losing out to Pegatron as the market had forecast.

Citigroup reiterated its “buy” rating on Hon Hai shares with a target price of NT$110, implying a 51 percent upside. The target price was set based on a price-to-earnings ratio of 12 times, indicating that it expects Hon Hai to earn NT$9.17 per share this year.

JPMorgan Securities analyst Gokul Hariharan said he expected Hon Hai’s margin to pick up strongly in the second half of this year due to better sales momentum of Apple products.

Positive factors also include some reversal of the iPhone rework fees booked in the first quarter and a higher mix of components in the second half of the year, Hariharan said in a separate note.

JPMorgan forecast Hon Hai will make a net profit of NT$103 billion (US$3.43 billion), or NT$8.7 per share, while Credit Suisse Securities forecast a net profit of NT$88.02 billion, or NT$7.44 per share.

“Our concerns with Hon Hai are the efficiency of the transition to new Apple products, order losses to Pegatron and its long-term strategy becoming increasingly unclear,” Credit Suisse analyst Thompson Wu (武光明) said in a note yesterday.

Both UBS analyst Arthur Hsieh (謝宗文) and Fubon Securities Investment Services Co (富邦投顧) analyst Arthur Liao (廖顯傑) were also less upbeat, forecasting this year’s earnings per share will be NT$5.57 and NT$5.87 respectively.