Hon Hai shares fall on record-low profit margin


TAIPEI — Shares of Hon Hai Precision Industry Co. moved lower on the Taiwan Stock Exchange yesterday after the world’s largest contract electronics maker reported a quarterly consolidated gross margin of under 7 percent for the first time in its history, dealers said.

The selling came largely from institutional investors, a sign that the squeezed profit margin had undermined their confidence and made them cautious about Hon Hai’s earnings outlook for 2012, they said.

Hon Hai yesterday fell 1.73 percent to end at NT$85.40. The company reported Monday 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.

During the January-March period, Hon Hai posted NT$1.40 in non-consolidated earnings per share, down from NT$3.18 registered a quarter earlier.

“The first quarter results have disappointed the market, in particular after Hon Hai saw its profit margins fall sharply from the fourth quarter,” Grand Cathay Securities analyst Mars Hsu said.

Hsu said the first quarter EPS was lower than the NT$1.8-NT$1.9 expected by the market after accounting for the first quarter being the industry’s low season.

“In addition to higher labor costs in China, I think the losses incurred by its Hong Kong-listed subsidiary Foxconn International Holdings (FIH) contributed a lot to Hon Hai’s fall in earnings,” Hsu said.

In late April, the holding company issued a profit warning on the Hong Kong Stock Exchange, saying its net loss for the first half of 2012 will likely see “a significant increase” from the same period last year on falling demand from its major customers.

FIH, which describes itself as a contract manufacturer of computer, communications and consumer electronics devices, incurred a net loss of US$17.11 million (NT$504 million) in the first six months of 2011.

“As Hon Hai holds about a 70 percent stake in FIH, the anticipated rise in the subsidiary’s first half losses is undermining the parent company’s bottom line,” Hsu said.

Hsu said it was no surprise that Hon Hai shares came under pressure after its first quarter results.

“More disturbingly, I don’t think Hon Hai will report improved results for the second quarter as its major customer Apple is in a product transition phase ahead of the launch of its new iPhone,” Hsu said.

According to Hsu, Apple accounts for about 45 percent of Hon Hai’s total sales. The analyst said Hon Hai’s results will hinge on when in the second half of this year Apple will unveil its new iPhone.

“I expect Hon Hai shares will face further downward pressure before it moves closer to the nearest technical support in the NT$80-NT$82 range,” Hsu said.