The outlook for Hon Hai Precision Industry Co (鴻海精密) this quarter remains upbeat after third-quarter results showed strong demand for Apple Inc’s new iPhone products, market watchers said.
CIMB Securities Ltd said Hon Hai’s performance for this quarter and next quarter would be better than its year-on-year seasonal average, thanks to strong consumer demand for the iPhone 6.
“We maintain our ‘add’ rating and tune up Hon Hai’s target price from NT$105 to NT$115,” CIMB analysts led by Wang Wanli (王萬里) said in a research note released on Thursday, after Hon Hai reported its third-quarter net profit rose 10.84 percent year-on-year and 68.87 percent quarter-on-quarter to NT$34.09 billion (US$1.1 billion).
The brokerage said potential boosts to Hon Hai’s share price in the near term include an upward margin trend and better-than-expected iPhone 6 sales.
Apple launched two new iPhone models in September — the 4.7-inch iPhone 6 and the 5.5-inch iPhone 6 Plus — and shipments are predicted to be between 87 million and 90 million units in the second half of the year.
Hon Hai’s gross margin was 7.1 percent last quarter, up from 7.05 percent in the previous quarter, while operating margin also rose 0.12 percentage points to 3.3 percent, the company said in a filing with the Taiwan Stock Exchange on Thursday.
Although its operating margin was lower than CIMB’s expectation of 3.6 percent and JPMorgan Securities Ltd’s forecast of 3.9 percent, it was up 3.77 percentage points from the 3.18 percent recorded in the previous quarter.
CIMB said Hon Hai’s operating margin for last quarter was depressed by surging labor costs in China, as the company had to hire temporary workers to meet iPhone 6 orders and that raised its labor costs.
However, the brokerage said the company’s operating margin would trend upward this quarter, due to its increase in the use of automation at its production facilities, which should improve efficiency and solve labor shortages.
Hon Hai’s reduction in lower-margin orders and a decline in the prices of raw materials such as copper and steel would also boost the company’s operating margin, CIMB said.
HSBC Securities Taiwan Corp forecast Hon Hai’s operating margin could reach 4.1 percent this year, the highest since 2010, with revenue growing by 16 percent from last year, higher than the 10 percent target set by Hon Hai chairman Terry Guo (郭台銘).
However, Yuanta Securities Investment Consulting Co (元大投顧) is cautious about Hon Hai’s outlook, as the company’s domestic rival Pegatron Corp (和碩) posted a relatively larger improvement in operating margin last quarter, suggesting that Pegatron is being favored over Hon Hai by Apple.
Pegatron’s operating margin of 2.99 percent last quarter was up 1.15 times from that recorded a year earlier and up 11.15 percentage points quarter-on-quarter.
"This suggests there is a risk to Hon Hai's iPhone allocation going forward," Yuanta analyst Vicent Chen (陳豐丰) said in a separate note, adding that he expects Pegatron to win more orders from Apple this quarter.
Despite some market watchers remaining positive about Hon Hai's performance this quarter, the company shares declined 1.22 percent to NT$96.8 in Taipei trading yesterday, underperforming the TAIEX, which gained 0.02 percent.
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