Leading touch solutions provider TPK Holding Co’s (宸鴻) earnings forecast and shares rating were downgraded by CLSA and KGI analysts on Monday given a gloomy near-term outlook and stiffer pricing competition from peers.
The Taipei-based company, which counts Apple Inc as its biggest customer, saw CLSA cut its earnings projections by 17 percent for this year and 54 percent for next year from previous estimates.
CLSA lowered TPK’s share rating to “sell” from “buy,” and revised downward its target price by 63 percent to NT$169, according to the brokerage.
“A complete review of our model for touch-technology provider TPK convinces us to turn negative on the stock, given rising competition and tighter margins,” CLSA analyst Skye Chen (陳淑玲) said in a client note.
Chen said TPK is facing greater competition from General Interface Solution Ltd (GIS, 英特盛), a touch panel manufacturing subsidiary of Hon Hai Group (鴻海集團), in the new iPad’s touchpanel business after GIS exhibited brisk improvement in its yield rates.
The firm will also encounter the entry of more players in the touchscreen notebook computer business as PC vendors have lowered specification requirements and customers are more willing to accept low-cost touch notebooks, Chen said.
As a result, CLSA forecast TPK would soon lose its wide-margin edge on products for Apple, falling to 15 percent from 20-25 percent, and see further price pressure, accelerating from a sequential decline of 3-5 percent to 5-10 percent.
The company’s market share in notebook touch panels is likely to fall to 62 percent this year, from the up to 80 percent estimated previously, and reach only 40 percent next year, from the 60 percent originally forecast, according to CLSA.
TPK shares have corrected by 56.8 percent since the beginning of the year, and which rose 0.68 percent to end at NT$221.5 yesterday.
However, the stock will face long-term downside risks as TPK’s fundamentals appear likely to deteriorate further next year, KGI Securities Co analyst Kao Tien-ching (高天慶) said.
“The touch panel industry will face unprecedented challenges in 2014,” Kao said, citing concerns about slowing demand for tablets and smartphones, limited growth potential for touchscreen notebooks, and falling prices due to more players in the market.
“TPK’s overall shipments will increase 15.5 percent to 170 million units in 2014 from this year, but the company’s sales will show an annual decline of 11 percent, reflecting a more than 20 percent decline in average selling prices next year,” Kao said.
The company’s gross margin will probably fall to 14.3 percent next year from the projected 15.3 percent this year, and its earnings per share will likely fall to NT$21.69 next year from the estimated NT$31.25 this year, he said.
KGI lowered its share rating on TPK to “neutral” from “outperform,” and cut the target price to NT$216.9 from NT$439.8.