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HTC warned of becoming pure hardware assembler

2012/08/21 12:18:26

Taipei, Aug. 21 (CNA) Taiwanese smartphone maker HTC Corp. may have lost its competitiveness after a series of poor investment decisions and could devolve into a low-tier phone maker, Australia's Macquarie Securities warned Monday.

HTC said on Monday that it will book an investment loss of US$40 million on its stake in OnLive Inc. after the U.S.-based cloud gaming service provider failed to meet its operational needs and announced over the weekend that it had restructured its assets.

The loss will be recognized in HTC's non-operating items in the third quarter of 2012, and its impact will be equivalent to earnings per share of NT$1.2 (US$0.04), according to Macquarie.

"With the failure of its investment in Beats and now OnLive, we see more evidence that HTC is becoming a pure hardware assembly company," Daniel Chang, an analyst at Macquarie Capital Securities Ltd.'s Taiwan Branch, wrote in a report.

This implies that HTC is just another tier-two or low-tier phone maker and that it will have to compete for market share with aggressive pricing going forward, Chang said.

"Yet, as we have pointed out before, HTC's cost structure is too high compared with many other low-cost makers; we are concerned about its margin outlook," he added.

Due to its strong cash flow, HTC made several investments in 2010 and 2011 to enhance its smartphone features and services, but it seems that these investments are struggling to bring any value to HTC or to survive as standalone companies.

In July this year, HTC announced the sale of part of its stake in Beats Electronics at a loss of US$4.88, but it also agreed to loan about NT$6.74 billion to the U.S. headphone supplier for one year.

"In fact, we think both the OnLive and Beats investments were the result of a poor investment decision process at HTC," Chang said.

In terms of the smartphone maker's operational outlook, Chang forecast that HTC would have trouble making an operating profit in the fourth quarter unless it aggressively cuts its operating expenses.

Chang believed HTC's sales in the fourth quarter could decline another 20 percent, and he expected its gross margin to fall.

HTC faces a dilemma, however, Chang said. If the company does aggressively cut its marketing expenses, it could put its branding and its new model roll-out in the first quarter of 2013 at risk, according to the analyst.

Macquarie maintained its "underperform" rating for the stock and its 12-month target price of NT$185.

Analysts at U.S. brokerage Morgan Stanley were equally downbeat about HTC's investment woes, describing the OnLive setback as clearly representing "a sentiment negative for HTC."

"Its write-off of OnLive investment might be proved to be another unsuccessful example of M&A deals for HTC after its recent retreat from Beats Investments in July, raising concern for the potential synergy for other investments," the analysts wrote in a report.

"While overall losses seem manageable, this appears to be another setback in its efforts to integrate software and differentiate itself from others," they said.

Morgan Stanley said HTC's loss on OnLive would represent about 23 percent of the brokerage's current forecast for HTC's third-quarter sales, or 4 percent of its 2012 EPS estimate for the company.

HTC shares had risen 1.25 percent to NT$242.5 as of 10:36 a.m. in Taipei Tuesday.

(By Jeffrey Wu)
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