The nation’s handset component sector is likely to feel the pain after Sony Ericsson Mobile Communications Ltd last week offered a worse-than-expected sales guidance for the first quarter, a Citigroup report showed.
As local handset component vendors have traditionally had high exposure to Western brand names such as Nokia, Motorola and Sony Ericsson rather than South Korea’s Samsung and LG, a sales warning by Sony Ericsson would translate into more price pressure and profitability erosion at local component suppliers in addition to worsening order flow from vendors, Citigroup Global Markets analyst Kevin Chang (張凱偉) said in the report.
On Friday, Sony Ericsson said in a press release that “weak consumer demand as well as de-stocking in the retail and distribution channels” have continued to have a negative impact on the world’s No. 4 handset maker’s sales and net income in the first quarter.
Sony Ericsson said it now forecast first-quarter shipment at about 14 million phones, down 42.1 percent from 24.2 million units it shipped in the previous quarter and a fall of 37 percent from 22.2 million units a year earlier.
The company also predicted a pretax loss of between 340 million euros (US$461.7 million) and 390 million euros in the first quarter, it said in its release.
Citigroup has forecast the global handset market will experience a decline of close to 20 percent in the first quarter from last quarter owing to an industry-wide contraction. Worldwide shipment is likely to fall 4 percent this year from last year and the market won’t stabilize before next year, Gartner Inc said in a statement on March 3.
“With falling scale and more price competition, margin [for top handset vendors] for first quarter of 2009 could drop further,” Chang said in the Citigroup report released on Saturday.
Against this backdrop, Chang said handset vendors and contract makers tended to force component suppliers to cut prices further in a way to alleviate their own margin pressure. Sony Ericsson, for instance, warned in its release that its gross margin would decline both year-on-year and quarter-on-quarter in the first three months of the year.
“We have heard that companies like Silitech and Largan are giving first quarter margin warnings because of falling utilization and price pressure,” he said.
Silitech Technology Corp (閎暉) is the world’s fourth-largest maker of mobile-phone keypads, while Largan Precision Co (大立光) is the nation’s leading maker of camera phone lenses.
With an industry wide shrinkage expected in the handset market and a possible idle capacity because of low market demand, Citigroup said it had “sell” ratings on the stocks of Largan, Merry Electronics Co (美律實業), a maker of phone receivers and microphones, and Compal Communications Inc (華寶通訊), a leading Taiwanese handset supplier.
The brokerage maintained a “hold” rating on Silitech.
In addition to Citigroup’s pessimistic outlook, Merrill Lynch analyst Laura Chen (陳佳儀) said in a client note on March 11 that she retained a conservative view on Taiwan’s handset component makers because of “muted order flow from non-Korean handset brands” and “ongoing pricing pressure.”
“In our view, if Samsung and LG continue to gain market share globally, Taiwan component makers will face further challenges given their lower exposure to the South Korean companies,” Chen said.
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