Bloomberg News

Hon Hai Posts Record Profit as Apple Expands Product Line

March 25, 2013

Hon Hai Posts Record Profit After Improving IPhone Production

A customer tries an Apple Inc. iPhone 5 at the company's store in the Wangfujing area of Beijing. Photographer: Tomohiro Ohsumi/Bloomberg

Hon Hai Precision Industry Co. (2317), the world’s largest contract manufacturer of electronics, posted record quarterly profit after it boosted production efficiency and output of Apple Inc. (AAPL:US) iPhones and iPads.

Fourth-quarter net income climbed 5.6 percent to NT$37 billion ($1.2 billion), according to data compiled by Bloomberg based on full-year results published yesterday. That’s ahead of the NT$35.9 billion average of 14 analyst estimates compiled by Bloomberg.

Hon Hai solved production problems that had crimped output of the iPhone 5 in the prior quarter, helping it raise revenue and margins. The Taipei-listed flagship of Terry Gou’s Foxconn Technology Group may face a drop in sales and profit this quarter as demand for the iPhone wanes amid growing competition from Samsung Electronics Co.

“As they scaled up production of the iPhone and solved production bottlenecks, Hon Hai’s profit margins improved and they may have had some room to push Apple for better pricing,” said Vincent Chen, who rates the stock buy at Yuanta Financial Holding Co. in Taipei. “Shipments of iPhone started to drop significantly in the first quarter and there may be no new product to boost sales a lot in the second quarter either.”

Consolidated revenue for the quarter climbed 6 percent to NT$1.14 trillion, compared with the NT$1.13 trillion average of 15 analyst estimates compiled by Bloomberg.

Full-year 2012 net income climbed 16 percent to NT$94.8 billion from NT$81.6 billion, the Taipei-based company said in an exchange statement. Revenue climbed 13 percent to a record NT$3.9 trillion, compared with Gou’s long-term target for 15 percent annual revenue growth.

Components and Assembly

Apple, which contracts Foxconn to make its iPhones and iPads, reported gross margin of 38.6 percent for the three months through December, the lowest in two years, an indication it’s paying more for components and assembly. Hon Hai’s profit margins usually rise when Apple’s fall, Bloomberg News previously reported.

Hon Hai’s own gross margin, which measures the ratio of sales less cost of goods sold, climbed to a three-year high of 9.58 percent in the fourth quarter, from 8.89 percent a year earlier and 9.54 percent in the prior period.

That implies it is getting more from customers such as Apple to manufacture devices, continuing a trend of rising margins that began last year and which reversed almost a decade of thinning profit ratios.

Seek More

“In the longer-term, manufacturers have to ask clients for more, there’s no way around this,” said Jitendra Waral, a Hong Kong-based technology analyst for Bloomberg Industries.

Scratching of the iPhone 5’s anodized aluminum casing forced Hon Hai to idle factories in the third-quarter after stricter quality-control benchmarks were imposed at the request of Apple, Bloomberg News reported in October. That problem was largely solved in the fourth-quarter, with output and yield improving.

Operating profit climbed to a record NT$41.7 billion in the quarter, with operating margin of 3.67 percent the widest in three years, according to data compiled by Bloomberg.

Apple sold a record 47.8 million iPhones during the period while the introduction of a new iPad and its iPad Mini helped that category to also post historic highs. Still, Apple’s outlook for its fiscal second-quarter, which ends this month, was below estimates as Asian rivals including Samsung, ZTE Corp. (000063) and Huawei Technologies Co. won sales.

Hon Hai’s earnings were dragged down by losses on its holdings of both Foxconn International Holdings Ltd. (2038), the Hong Kong-listed maker of handsets for Nokia Oyj (NOK1V) and BlackBerry, and Innolux Corp., the Miaoli, Taiwan-based maker of display panels.

Sharp Stake

Gou, who founded the company 39 years ago, is looking to new investments and products to boost sales amid slowing demand for computers, games consoles and consumer electronics.

A plan for Foxconn to buy a 9.9 percent stake in Sharp Corp., announced a year ago, has yet to be completed as the two can’t agree on issues including price, management control and company strategy, Bloomberg News reported in February. Gou also bought a stake in Sharp’s TV panel factory, called Sakai Display, using his own money, with that transaction already completed.

“Terry Gou doesn’t really care about Sharp anymore, he only cares about Sakai,” said Yuanta’s Chen. “If he can’t direct or dictate things at Sharp, then the only thing left is technology and he may not get access to that either.”

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story: Robert Fenner at rfenner@bloomberg.net


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