Hon Hai Precision Industry Co (鴻海精密) will maintain its sales momentum in the second quarter after it reported stronger-than-expected first-quarter figures last week, but the company will face lower margins this year due to its business strategy, analysts said.
Hon Hai, which markets Sony TVs, HP printers and Apple iPhones, reported on Friday that its sales last month increased 52.58 percent year-on-year and 29.22 percent month-on-month to NT$156.97 billion (US$4.97 billion), as a result of recovering global demand.
In the first three months, the world’s biggest electronics contract manufacturer, which sells products overseas under the Foxconn (富士康) brand, saw its revenue expand 49.19 percent year-on-year to NT$414.77 billion but down 6.29 percent from the previous quarter, according to statistics listed in a stock exchange filing.
Friday’s figures were released on an unconsolidated basis. Hon Hai will release consolidated numbers for last quarter and this quarter later in the month.
Commenting on Hon Hai’s unconsolidated figures for last month and the first-quarter, Citigroup analyst Kevin Chang (張凱偉) said in a note to clients that the firm’s strong performance was driven mainly by Hon Hai ramping up production of Sony Corp’s LCD TVs, Apple Inc’s new iPad tablet computers, as well as Hewlett-Packard Co’s printers and notebook computers.
Shares in Hon Hai rose 1.4 percent to NT$144.50 on Friday before the release of the last month and first-quarter figures. The company’s stock has dropped 4.62 percent so far this year, compared with a 1.17-percent fall on the benchmark TAIEX.
Morgan Stanley analyst Jasmine Lu (呂智穎) said on Friday that she expected Hon Hai to maintain its strong sales momentum into the second quarter.
“This should be driven by new project ramp, ongoing [market] share gains, as well as a cyclical recovery,” Lu wrote in a research note.
Following purchases of a PC factory in Poland from Dell Inc in December and a TV plant in Mexico from Sony in September, Hon Hai has tapped into new businesses such as printers, LCD TVs, notebooks and iPads since the beginning of this year, as the company aims to diversify its product portfolio and maintain growth momentum. Hon Hai announced earlier this month that it is to acquire another Sony TV plant in Slovakia.
Lu’s positive tone echoed an upward adjustment in the full-year revenue forecast for Hon Hai from Credit Suisse analyst Robert Cheng (鄭勝榮) on April 1, who renewed the firm’s shipment estimates for iPad, iPhone and notebooks this year.
Cheng forecasts Hon Hai will post NT$2.53 trillion in revenue this year and NT$2.46 trillion next year on a consolidated basis, compared with NT$1.96 trillion for last year.
The company’s new business strategy, however, has also raised concerns with analysts saying Hon Hai will face margin pressure this year.
Citigroup’s Chang said the market might have underestimated the sharpness of margin erosion at Hon Hai as a result of the new businesses and rising labor costs.
“We note that more than half of Hon Hai’s 2010 revenue growth comes from printers, TVs, notebooks and iPads, which Hon Hai has never produced on a meaningful scale before,” Chang said.
“It could take more than a year for Hon Hai to improve its yield rate, renegotiate the current supply chain, and finally supply components in house,” he said.
Moreover, the company recently decided to raise employee salaries in Taiwan as the economy recovers and there is likely to be an increase in production costs in China due to a labor shortage.
Credit Suisse’s Cheng also revised down his earning forecast for Hon Hai to NT$89.76 billion this year, from previous estimate of NT$91.06 billion, whilst expressing concern over this cost structure problem.
Hon Hai is expected to have an operating margin of 4.5 percent this year, up from 3.9 percent last year, according to market consensus. Credit Suisse now predicts 4.1 percent this year and Citigroup expects 3.9 percent.
In comparison, Morgan Stanley is less pessimistic about Hon Hai’s deteriorating margins. Rather, the brokerage believes the company’s new retail venture with Germany’s Metro Group in China — in which the Taiwanese firm owns a 25 percent stake and will see its first retail outlet opened in Shanghai later this year — will allow Hon Hai to better understand consumer needs and therefore use that market feedback to win more orders from its contract clients, Lu said.
“In our view, rising in-house component supply, shifts to inland [China] where Hon Hai gains competitive edge in terms of wages and labor supply on top of tax benefits should outweigh any gross margin pressure resulting from the change to product mix,” Lu wrote.
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