HTC shares rebound, but analysts remain wary

TOO LITTLE, TOO LATE?:HTC’s recent moves were steering it in the right direction, but it might be too late to reverse the downtrend, an analyst said

By Kevin Chen  /  Staff reporter

Thu, Nov 07, 2013 - Page 14

Smartphone vendor HTC Corp (宏達電) yesterday saw its share price move higher on bargain hunting following a plunge of 6.95 percent on Tuesday, but analysts said the company could still be unprofitable this quarter.

While the company’s sufficient working capital should provide it a short-term cushion, it still faces uncertainties on whether it can turn its fortunes around next year, analysts said.

Taoyuan-based HTC is likely to post an operating loss of NT$1.5 billion (US$50.9 million) in the fourth quarter, UBS Securities analyst Arthur Hsieh (謝宗文) said. Hsieh’s peers at JPMorgan Securities, led by Alvin Kwock (郭彥麟), expect an operating loss of more than NT$1 billion, while SinoPac Securities Co (永豐金證券) analyst Frank Kuo (郭勁甫) put his forecast as high as a NT$1.85 billion loss.

In the third quarter, the company suffered an operating loss of NT$3.5 billion, the first in its history, with an operating margin of minus-7.43 percent.

The analysts’ forecasts came after HTC on Tuesday issued a guidance that its sales might fall to between NT$40 billion and NT$45 billion during the final three months of the year, from NT$47 billion last quarter, with gross margin sliding to between 19 percent and 21 percent, from 20.4 percent last quarter, and operating expenses of less than NT$10 billion.

The company’s sales guidance is better than market speculation of a range of between NT$30 billion and NT$35 billion for the fourth quarter, which helped HTC shares close 3.91 percent higher at NT$146 yesterday.

During its conference call on Tuesday, HTC said it also expects to post between NT$0.1 and NT$1.7 in earnings per share in the current quarter, compared with a loss per share of NT$3.58 last quarter, as well as a mention of its efforts to improve the firm’s marketing efficiency, supply chain management and product innovation.

However, Frank Kuo said the company’s core business is still facing tremendous challenges, including a lack of economies of scale, relatively weak development of key components by itself and an insufficient number of patents.

Hsieh said it is unclear how HTC would prioritize its resource allocation. Another concern is that HTC may squeeze its suppliers too hard, he added.

If this happens, “the latter [suppliers] may not commit [their] resources to support HTC in the future,” Hsieh said in a client note.

However, Credit Suisse Securities analyst Pauline Chen (陳柏齡) said the company’s recent moves, such as reshuffling its management team, conducting more reviews of its channel inventory and strengthening cooperation with major operators in China, were steering its operations in the right direction.

“While we view these changes as positive, it might be too late to reverse the trend given increased competition and its increasing scale disadvantages,” Chen said in a separate note yesterday.

Chen said HTC's earnings per share forecast of NT$0.1 to NT$1.7 for this quarter was largely because of the one-time disposal gains of NT$2.52 billion from selling its remaining shares in Bats Electronics LLC, adding that the firm could still post an operating loss this quarter.

"In the case of Nokia and RIM [BlackBerry], once they start losing money, it has normally lasted for several quarters," Chen added.

JPMorgan said it could understand the rationale behind the company’s restructuring and agreed with HTC’s attempt to use the Chinese market to engineer a comeback.

The brokerage said that if HTC could work with China Mobile Ltd (中國移動) to supply smartphones for China’s 4G network, the firm does have a chance to turn its fortunes around next year, although it would likely be a short-term fix.