Taipei, May 12 (CNA) Deutsche Securities has downgraded its recommendation on shares of Compal Electronics Inc., one of Taiwan's leading contract notebook computer makers, to a "hold" from a "buy" amid concerns over rising labor costs in China.
In a recent research note, the brokerage said wages in China have risen about 15 percent in the past year and the increase is expected to translate into a US$1 (NT$29.4) increase in labor costs per notebook computer assembled, which would be significant to a contract manufacturer such as Compal.
Compal currently operates four production bases in China, in Nanjing, Kunshan, Chongqing and Chengdu, according to its website.
In addition to the impact from wage hikes in China, Deutsche Securities did not expect Compal's research and development investment in mobile Internet devices to generate a favorable return because of the dominance of Apple's iPad in the segment and increasingly fierce competition in the global tablet computer business.
The brokerage also predicted that due to Compal's rising capitalexpenditure and higher operating costs, its cash flow will suffer.
According to the report, Compal's operating free cash flow, an indicator of the cash generated by a company's operations, is expected to fall to NT$1 billion (US$34 million) in 2012, from NT$28 billion in 2011 and NT$16 billion in 2010.
Reflecting Compal's increasing R&D expenses and operating costs, Deutsche Securities lowered its forecast for the company's earnings per share for 2012 and 2013 by 11 percent and 5 percent, respectively, to NT$3.27 and NT$3.87.
In 2011, Compal earned NT$2.53 per share, down from NT$5.38 in 2010. In the first quarter of this year, it posted an EPS of NT$0.43, compared with NT$0.49 in the fourth quarter of last year and NT$0.80 over the same period last year.
Deutsche Securities maintained its target price for Compal shares at NT$34.
Shares of Compal closed down 2.67 percent at NT$32.85 on the Taiwan Stock Exchange Friday.
(By Lo Hsiu-wen and Frances Huang)