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Barclays warns high marketing expenses to hurt HTC earnings (update)

2013/07/02 13:25:04

Taipei, July 2 (CNA) British bank Barclays Plc has cut its estimate for HTC Corp.'s earnings in 2013 because of concerns that the Taiwanese smartphone maker will have to boost spending on marketing to counter fierce competition.

Barclays reduced its forecast for HTC's 2013 earnings per share by 16 percent to NT$14 (US$0.47) from NT$16.68 on expectations that HTC will increase its marketing budget and sweeten incentives to mobile operators and retail channels.

"We expect the marketing war, led by Samsung and Sony, to force HTC to increase global co-marketing and incentive programs, a negative for margins," Dale Gai, a Barclays analyst in Taipei, wrote in a note to clients dated June 28.

He stated that the risks to HTC in the high-end smartphone market will come from an increasingly long replacement period in developed countries, a shorter product cycle, less differentiation in the Android platform, and decreasing subsidies from operators.

Gai expected HTC to increase its marketing expenses by 20-25 percent in 2013 and 2014, which will push its ratio of operating expenses (sales & marketing, administration and R&D expenses) to sales to 20-21 percent, from 14 percent in 2011 and 19 percent in 2012.

The 20-21 percent level would be comparable to the levels of rivals Samsung Electronics Co. and LG Electronics Inc. without giving HTC the same amount of exposure in the global market, the analyst said.

Gai expected HTC's second-quarter sales to reach NT$75 billion, which would be 7-8 percent higher than the company's guidance, and forecast its third-quarter sales to grow by 12 percent sequentially driven by new models and solid demand for the new HTC One.

He maintained an "underweight" rating on the stock and a target price of NT$250. HTC shares had fallen 2.6 percent to NT$225 as of 12:26 p.m. in Taipei.

Daniel Chang, an analyst at Macquarie Capital Securities Ltd.'s Taiwan branch, was less optimistic. He warned that the market has overestimated the momentum of the new HTC One, ignoring the mature high-end market and Samsung's aggressive marketing.

"We agree HTC One is a good phone but our key concerns remain the maturing high-end market, which will lead to significant price competition, and HTC's inability to compete in the low-end space," Chang said in a recent report.

He rated "underperform" on HTC shares and lowered the stock's target price to NT$148 from NT$198.

In a separate report on June 28, foreign brokerage BNP Paribas Securities lowered its rating for HTC shares to "reduce" with a target price of NT$171, major reversals of its "buy" rating and NT$325 target price set in its previous report on May 29.

Though HTC is likely to meet or exceed its sales guidance of NT$70 billion for the second quarter, the company might see little growth in orders sequentially in the third quarter because of heavier competition from larger-screen phones, BNP Paribas said.

The brokerage firm cut its previous estimates for HTC's earnings by 29 percent for 2013 and by 19 percent for 2014 over concerns that HTC could have trouble gaining market share at the high-end of the American market in the first half of 2014, when Apple Inc. is expected to launch a larger iPhone.

(By Jeffrey Wu)