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Foreign banks cut target prices for Hon Hai

2012/05/15 19:40:44

Taipei, May 15 (CNA) Two foreign institutional banks trimmed their target prices for shares of Hon Hai Precision Industry Co. Tuesday after the world's largest contract electronics maker posted a record-low quarterly profit margin.

The main manufacturer for Apple Inc. reported a day earlier that its consolidated gross margin fell to 6.64 percent in the first quarter, compared with 8.89 percent in the fourth quarter of last year, while its consolidated operating margin dropped to 1.52 percent from 3.29 percent, quarter-on-quarter.

During the January-March period, Hon Hai posted NT$1.40 (US$0.0475) in non-consolidated earnings per share, down from NT$3.18 registered in the previous quarter.

UBS Securities maintained a "sell" rating on the firm and cut its target share price to NT$82 (US$2.78) from NT$90, citing a slower-than-expected recovery in profitability and a weak yield rate.

"Even though a design change from the iPad 2 to the new iPad was very limited, Hon Hai still suffered from a low production yield rate issue," UBS analyst Arthur Hsieh wrote in a research note.

"We think the risk is even higher for the coming iPhone 5, because we expect it to be a complete design revamp, which could make it more difficult to produce," he said.

Hsieh said that Hon Hai's potential strong sales in the third quarter of 2012 might not translate into strong net income.

Meanwhile, Bank of America Merrill Lynch maintained an "underperform" rating and revised downward its target price from NT$96 to NT$83 per share, as it believes Hon Hai's over-capacity and investment has resulted in high volatility on earnings and margins.

"We forecast that Hon Hai's second-quarter sales will drop 9 percent from the previous quarter, and that the slow sales situation could extend to the third quarter due to likely delays in shipments of the new iPhone," said Merrill Lynch analyst Robert Cheng.

"The company might have difficulty reaching its 15 percent annual sales growth target," he said.

"Its key customer is adding a second source vendor, which will impact its future growth momentum," he added.

Barclays Capital, however, remained upbeat about Hon Hai's sales growth in the long term, although it said its ongoing margin recovery in 2012 may be slower and bumpier than the bank has anticipated.

"We remain confident in Hon Hai's long-term story, including its strong Apple product pipeline and its inland relocation cost reductions," said Kirk Yang, an analyst at Barclays Capital in Hong Kong. He was referring to Hon Hai's moves to relocate assembly lines away from China's coastal regions and into the country's hinterland.

"We still do not see many catalysts in the second quarter of 2012, but we expect strong performance in the second half of this year from the new product cycle," he said.

The British bank maintained an "overweight" rating and a target price of NT$125 for Hon Hai shares.

The company's shares closed up 1.73 percent at NT$85.4 Tuesday on the local bourse.

(By Jeffrey Wu)
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