The Hon Hai Group’s (鴻海集團) planned investment in Asia Pacific Telecom Co (亞太電信) has prompted analysts to re-examine the Foxconn-brand company’s telecommunications strategy and its future industry position.
While the partnership could help Hon Hai in its foray into the 4G field, it is expected to have limited profit contributions in the near term, analysts said.
However, the partnership is essential to Hon Hai’s long-term business transformation, they said.
“Hon Hai’s telco strategy could have much bigger underlying implications for the transformation of its business long-term, instead of simply increasing its hardware sales,” Citigroup Global Markets Inc analyst Wei Chen (陳思維) said in a client note issued on Tuesday.
On Monday night, Hon Hai Precision Industry Co’s (鴻海精密) telecom subsidiary, Ambit Microsystems Corp (國碁電子), said it would spend NT$11.67 billion (US$387.1 million) to acquire 70 percent, or 583 million common shares, of Asia Pacific Telecom’s private placement at NT$20 per share.
The purchase will give Ambit a nearly 14 percent stake in Asia Pacific Telecom, making it the firm’s largest shareholder, surpassing the Taiwan Railways Administration’s (台鐵) 12 percent.
After that, the two companies will negotiate a merger via a share swap, according to their separate stock exchange filings.
Chen said the planned merger between Ambit and Asia Pacific Telecom could see Hon Hai’s hardware sales migrate to a “subsidized business model” in the upcoming era of Internet of Things, while the new telecom business could become a key channel for Hon Hai to sell various electronic devices.
Moreover, the company could provide services or targeted advertising based on valuable information on consumer behavior and other data, which are collected from its telecom operations, Chen said.
“We believe Hon Hai’s end-game could be in big data and the Internet of things,” he said.
Another analyst at Deutsche Bank said the transaction might be more expensive than expected, but the deal is very important to Hon Hai in terms of strategic significance.
“We see the significant synergies from the acquisition to help Hon Hai successfully penetrate into the 4G and cloud [data centers, intranet] businesses,” Deutsche Bank analyst Andrew Chang (張家福) said.
Chang said the new partnership with Asia Pacific Telecom would allow Hon Hai to offer “one-stop shopping” — from manufacturing to design, distribution and sales — for its smartphone and networking brand clients.
In addition, the company will see rising opportunity in the long run by leveraging Taiwan Railways Administration to further build its intranet and networking infrastructure business around the nation, he said.
JPMorgan analysts led by Gokul Hariharan said that Hon Hai’s new strategy in the telecom business is unlikely to lift its bottom line any time soon.
“Taiwan telco market has seen two new entrants, Hon Hai and Ting Hsin (頂新), in the past 12 months, which could affect returns adversely. This business has the prospect to be a cash generative one, but the period of consolidation could again be painful given the resources behind both new entrants,” they said in a research note on Tuesday.
Ting Hsin International Group’s subsidiary, Taiwan Star Cellular Corp (台灣之星), announced in November last year that it would merge local peer, Vibo Telecom Inc (威寶電信), in preparation for the upcoming 4G service launch.
Hon Hai will still have to largely rely on Apple Inc’s product line-up and non-Apple businesses such as BlackBerry Ltd’s smartphones and Sony Corp’s game consoles to boost its profitability this year, they added.
Hon Hai shares rose 0.65 percent to NT$93.40 yesterday in Taipei trading, outperforming the broader market by 22.5 percent so far this year.
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