Shares of HTC Corp (宏達電), the world’s fifth-largest smartphone brand, tumbled by the daily limit yesterday after Citigroup issued a downgrade on the stock on concern over its acquisition of S3 Graphics Co and rising competition from Samsung Electronics Co.
The stock closed 6.85 percent lower at NT$1,020 on the Taiwan Stock Exchange yesterday. It has fallen 20.62 percent in the past month, although it has risen 13.33 percent since the start of the year, the exchange’s data showed.
Taiwan’s electronics stocks have dropped 6.6 percent in the past month and are down 6.73 percent since the beginning of the year.
“We are downgrading HTC from ‘Buy’ to ‘Sell’ and cutting our target price to NT$927 [from NT$1,470],” Citibank said in a report playing down HTC’s US$300 million purchase of S3 Graphic, a US-based graphic chip designer.
The deal raises concerns given potential conflicts of interest, although HTC may have legitimate reasons to improve its bargaining power against a patent lawsuit from Apple Inc, the report said, saying that the initial ruling from the US International Trade Commission last week suggested Apple infringed on two patents held by S3 Graphics.
The potential conflicts of interest arise because S3 Graphics is a private company owned by both VIA Technologies (威盛電子), a x86 microprocessor maker, and investment fund WTI Investment International, the Citigroup report said. Cher Wang (王雪紅), chairwoman of both VIA and HTC, is an indirect significant shareholder in WTI, meaning she already has some -control over S3 Graphics, it said.
S3 Graphics, which has 36 employees, has had a net loss of US$9.15 million, but HTC chief financial officer Wiston Yung (容覺生) said on Wednesday that S3 patents have not been taken into account in its net value and the patents “will bring in values of more than US$300 million in the next one to two years.”
HTC is eyeing S3 Graphics’ technologies because its algorithms have increasingly been applied to smartphones and tablet PCs, as well as advanced 3D video graphics.
While HTC said on Wednesday the acquisition would boost its intellectual property portfolio with an additional 235 patents and the pending applications, Citigroup said that to defend itself from Apple’s lawsuit, “HTC could license the patent exclusively from S3 Graphics rather than acquiring the entire company. We reckon this could significantly alleviate the concerns of corporate governance,” according to the report.
The report also raised concerns over intensified rivalry from Samsung, with Citigroup saying the latter’s Galaxy S II had successfully challenged HTC’s status as the best Android smartphone maker.
“Galaxy S II was able to score better than HTC Sensation on its processor performance, while at the same time beating Sensation in battery life … driven by Samsung’s AMOLED panel. This gives Samsung a substantial competitive advantage,” the report said.
While Citigroup seemed to have no confidence in the HTC-S3 Graphics’deal, other securities houses such as Morgan Stanley, Goldman Sachs and BNP Paribas maintained their ratings on HTC with unchanged target prices.
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