Bloomberg News

Hon Hai Profit Beats Estimates on New Products From Apple (4)

November 14, 2013

Hon Hai Precision Industry Co. (2317), flagship of electronics maker Foxconn Technology Group, posted profit that beat analyst estimates as it assembled new products including Apple Inc. (AAPL:US) iPhones and Sony Corp. game consoles.

Third-quarter net income climbed 1.6 percent to NT$30.8 billion ($1 billion), according to a filing by the Taipei-based company to the Taiwan Stock Exchange yesterday. The average of 13 analysts’ estimates compiled by Bloomberg was for profit of NT$25.5 billion. Shares rose today in Taipei trading.

New devices including the latest iPhones and preparation for the latest iPads helped revenue climb from the previous quarter. That may not be enough to overcome sliding demand for computers, and the company may miss its target for 15 percent annual sales growth, according to Kirk Yang at Barclays Plc.

“Operating margins were helped by the introduction of new products including the iPhone and Sony’s upcoming games console,” said Gokul Hariharan, an analyst at JPMorgan Chase & Co. in Hong Kong. Margins are usually higher at the start of a product release and drop as clients push prices lower, he said.

Third-quarter sales were NT$919 billion, the company reported Oct. 9, missing the NT$959.5 billion average of analyst estimates at the time. Operating profit rose to NT$31.8 billion during the period, it said yesterday, compared with estimates for NT$29.4 billion.

Hon Hai shares rose 1.3 percent to close at NT$75.40 in Taipei trading. The stock has declined 6.7 percent this year, compared with a 5.7 percent gain in the benchmark Taiex index.

Engineering Revenue

Hon Hai’s third-quarter profit was probably boosted by so-called non-recurring engineering revenue, which is paid by clients after the supplier completes research and development on a new product, Vincent Chen, an analyst at Yuanta Financial Holding Co. in Taipei, said by telephone.

Pretax income of NT$35.8 billion beat the NT$31.8 billion average of analysts’ estimates, according to data compiled by Bloomberg, indicating that non-operating items exceeded expectations. Non-operating profit wasn’t published in yesterday’s earnings report, and the company didn’t provide an explanation.

While net income beat estimates, growth was the slowest in five quarters, according to data compiled by Bloomberg. Revenue for January to October fell 3.2 percent to NT$3 trillion, Hon Hai said in an e-mailed statement on Nov. 8.

“We continue to suggest investors switch out of Hon Hai on any strength, as this might be the last good news of the year,” Barclays analyst Yang wrote in a note today. “Our concern remains Hon Hai’s long-term growth prospects.”

Largest Client

Foxconn’s billionaire chairman Terry Gou has a long-term goal of 15 percent annual sales growth and on Oct. 31 said earnings-per-share this year will be at least as good as 2012. Gou has a net worth of $5.1 billion, according to the Bloomberg Billionaires Index.

Apple, Hon Hai’s largest client, on Oct. 28 forecast gross margin for the quarter ending Dec. 31 that missed analyst estimates because of higher costs for introducing the new iPhone and iPad. Hon Hai’s margins usually move in an inverse direction to those of Apple, according to data compiled by Bloomberg.

In addition to contract manufacturing, Gou is leading his group to invest in software, games and telecommunications as part of plans to broaden Foxconn’s revenue base. Last month, Foxconn secured mobile-phone spectrum in Taiwan.

Ambit Microsystems Corp., a wholly owned unit of Hon Hai, agreed to pay NT$9.18 billion for 20-megahertz of wireless bandwidth at an auction, marking Gou’s first foray into the telecommunications business since he founded the company 39 years ago. Foxconn plans to bid for licenses elsewhere in Asia, including Indonesia, spokesman Simon Hsing said last month.

Hon Hai yesterday said it will invest a further NT$6 billion into Ambit, will set up an online education company in China for $14.9 million (NT$441 million) and spend $41 million to establish a touch-panel module business there.

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

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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