Shares of Hon Hai Precision Industry Co (鴻海精密) plunged by nearly the 7 percent daily limit after it posted disappointing second-quarter earnings on Monday as it was dragged down by unprofitable handset subsidiary Foxconn International Holdings Ltd (FIH, 富士康) and rising costs from its factory relocation.
The stock price of Hon Hai dived 6.61 percent, or NT$8, to NT$113 yesterday after the world’s top electronics maker reported a 6.9 percent decline in net profits to NT$16.75 billion (US$521.8 million) for the second quarter, from NT$17.99 billion in the first quarter.
The second-quarter results were 12 percent below the market consensus, said Vincent Chen (陳豊丰), an analyst with Yuanta Securities (元大證券), though the result matched his estimate.
“We believe the market has underestimated the negative impact of plant and labor relocation,” Chen said in a report released yesterday.
Hon Hai, which is gradually moving part of its labor and production lines to inland Chinese cities such as Zhengzhou, Chengdu and Tianjin from Shenzhen, Guangdong Province, posted a lower operating profit margin of 3.1 percent for the second quarter from 3.7 percent in the first quarter.
Chen retained his “hold” rating on Hon Hai and suggested investors switch to cheaper peer Wistron Corp (緯創).
JPMorgan analyst Gokul Hariharan said Hon Hai’s second-quarter net profits were 9 percent below his estimate, and attributed the disappointing results to losses at the Hong Kong-listed FIH.
FIH’s losses almost quadrupled last quarter to US$115 million from US$30 million in the first quarter because of weak smartphone business, Hariharan said in a report on Monday.
The magnitude of the loss at FIH is an unwelcome surprise given repeated restructuring over the last two years, he said.
Citigroup analyst Kevin Chang (張凱偉) said Hon Hai was holding up its margin quite well by leveraging its rapid revenue growth.
“If FIH could reach the break-even level in the second half of 2010, we believe that Hon Hai may even be able to deliver surprise positive earnings for 2010,” Chang said in a client note on Monday.
Robert Cheng (鄭勝榮), an analyst with Credit Suisse, said the impact of FIH would decrease quickly as the handset maker accounted for a small portion, or 8.6 percent, of Hon Hai’s overall revenues in the first half.
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