S&P Global Ratings has turned cautious on Hon Hai Precision Industry Co’s (鴻海精密) finances, on Friday revising its outlook from “positive” to “stable.”
The company is unlikely to strengthen its profitability and balance sheet significantly over the next two years, S&P said, although it maintained Hon Hai’s debt rating at “A-” — which is in the middle of its investment grading system.
S&P’s announcement came as Hon Hai shares resumed trading on the Taiwan Stock Exchange after a week-long break for the firm to complete a 20 percent capital reduction to NT$138.63 billion (US$4.47 billion).
Shares closed down 7.75 percent on Friday, compared with the TAIEX’s 0.33 percent dip.
Hon Hai’s profitability has weakened substantially over the past four quarters, S&P said, partially due to the adoption of a new business model for consumer electronics: integration, innovation, design and manufacture (IIDM).
“We believe delays from production issues and subsequent weaker sales of iPhones than we expected also negatively affected the company’s profitability over the past few quarters,” S&P credit analyst Hins Li said in a statement.
“Hon Hai’s profitability could continue to be sensitive to the success of its key client’s new products. Intense competition and strong buyer power could also suppress margins,” Li said.
Hon Hai’s earnings before interest, taxes, depreciation and amortization (EBITDA) margin fell to 3.8 percent last year from 5.6 percent in 2016, S&P said.
The figure is unlikely to show a marked improvement this year, due to high initial development costs required for new products and business infrastructure, it said.
Noting the company’s net debt to EBITDA fell to 0.8 last year, compared with a net cash position in 2016, S&P said this indicated the likelihood of a conservative policy on debt leverage going forward.
Hon Hai could sustain its current level of profitability and keep its return on capital at 13 to 15 percent over the next two years, supported by its traditional operations in electronic manufacturing services (EMS), although the new IIDM business model for Nokia smartphones and Sharp TVs is likely to face headwinds, S&P said.
“We expect the company to maintain its strong market position in the global EMS market, because of its vertical integration, strong component capability and scale economy,” Li said.
Hon Hai holds the upper hand over its rivals in terms of close ties with Apple Inc, with a stable share of its outsourcing demand, despite constant pricing pressures, he said.
However, Yuanta Securities Investment Consulting Co (元大投顧) said gaining a larger share in iPhone orders than other assemblers would not be enough to offset the impact of an economic downturn.
“Being the largest EMS in the world, we believe Hon Hai will suffer during the economic downturn,” Yuanta analyst Vincent Chen (陳豊丰) on Thursday said in a research note.
With up to 90 percent of its capacity in China, more US tariffs on Chinese imports would have a significant effect on Hon Hai, he said.
“Moving capacity outside of China will be a huge challenge for EMS companies like Hon Hai in terms of additional costs and expenses,” Chen said.
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