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Foreign banks cut target prices for Hon Hai on poor earnings

2012/05/01 19:40:58

Taipei, May 1 (CNA) Foreign institutional banks have cut their target prices for shares of Hon Hai Precision Industry Co. after the main manufacturer of Apple Inc. products surprised investors with disappointing first quarter results.

Taiwan-based Hon Hai reported unconsolidated first-quarter sales of NT$789.94 billion (US$27 billion) and a net income of NT$14.92 billion April 28, down 14.1 percent and 57.3 percent, respectively, from the fourth quarter of last year.

Its earnings per share stood at NT$1.4, lower than the market consensus of between NT$1.8 and NT$2.2.

J.P. Morgan downgraded Hon Hai shares from "overweight" to "neutral" and reduced its target price from NT$140 to NT$105, saying the big drop was due to widening losses in Hon Hai's subsidiary, Foxconn International Holdings, coupled with labor cost hikes in its Chinese plants.

"We believe the stock will be sluggish in the next three months, given slower revenue momentum in the second quarter of 2012," analysts of the bank said recently in a research note to clients.

"While Hon Hai increased wages by 16 to 25 percent for employees in Shenzhen, China, payments from customers were not forthcoming in the first quarter of 2012, leading to a timing mismatch," the analysts said.

Bank of America Merrill Lynch maintained an "underperforming" rating and trimmed its target price from NT$100 to NT$96, citing the higher labor costs, unfavorable currency trend and low yield rate on the new iPad.

"We believe iPhones might already contribute 25 to 35 percent of Hon Hai's sales and is one of the most profitable businesses for the company," said Merrill Lynch analyst Robert Cheng.

"The iPhone momentum is likely to slow down in the coming three to six months because of likely delays in model transition," he added.

UBS Securities analyst Arthur Hsieh said Hon Hai could continue to invest in new technologies and thus, the operating expense ratio might not go down as fast as the bank had previously expected.

Given the higher operating expense ratio and the wage hikes, UBS downgraded its stock rating on Hon Hai from "buy" to "sell" and lowered its target price from NT$120 to NT$90.

Further, Morgan Stanley maintained an "overweight" rating and cut its target price for Hon Hai from NT$130 to NT$115, as it believes the firm's share price is likely to face short-term pressure, while its long-term margin recovery remains on track.

Barclays Capital also continued to see Hon Hai's share price under short-term pressure because of Apple product transition, with few catalysts for the company in the second quarter of 2012.

However, the British bank looks forward to strong sales for Hon Hai in the second half of 2012 thanks to the expected iPhone 5, although Hon Hai's financial transparency remains one of its biggest concerns, as evidenced by the surprising first-quarter results.

Therefore, Barclays maintained a stock recommendation rating of "overweight" for Hon Hai and kept its target price of NT$125.

Hon Hai shares closed down 6.95 percent at NT$92.4 in Taipei Monday. The stock market was closed Tuesday for the Labor Day holiday.

(By Jeffrey Wu)