TAIPEI (CNA) – Foreign brokerages had notably different responses after Taiwan-based manufacturing giant Hon Hai Precision Industry Co. (鴻海), the iPhone assembler, reported a decline in its profit margins for the third quarter of the year.
An Asian brokerage said the fall in Hon Hai’s profit margins largely reflected a delay in shipments of Apple Inc.’s premium iPhone X caused by difficulties that arose because of the significant upgrade in specifications.
The iPhone X, which was unveiled in September and went on sale in early November, is the model used by Apple to celebrate the smartphone’s 10th anniversary. Global demand for the iPhone X has been strong but supply has been limited, making it hard to meet demand.
During the July-September period, Hon Hai posted NT$21.03 billion (US$699 million) in net profit, up 17.61 percent from the previous quarter but down 39.29 percent from a year earlier.
Market analysts said the sequential profit increase resulted from non-core investments which referred to the return on Hon Hai’s investment in Japan’s Sharp. Corp., in which the Taiwanese firm holds a 66 percent stake.
In the third quarter, Hon Hai’s gross margin, the difference between revenue and cost of goods sold, fell to 5.83 percent from 6.81 percent in the second quarter and its operating margin, the difference between sales and the cost of goods sold as well as operating expenses, dropped from 2.71 percent to 1.74 percent.
However, the Asian securities house said production of the iPhone X is expected to pick up in the fourth quarter, which should boost Hon Hai’s sales in the fourth quarter significantly. Even better, the company’s momentum is expected to continue into the first quarter of next year. Hon Hai is said to serve as the sole assembler of the iPhone X, the largest of the three latest iPhone models.
The brokerage said it has left a target price of NT$136.00 on Hon Hai shares unchanged, while maintaining a “buy” rating on the stock.
On Friday, Hon Hai shares closed up 1.44 percent at NT$105.50 in line with the broader market, where the weighted index ended up 0.72 percent on a technical rebound.
A brokerage from the United States, which has reiterated an “overweight” recommendation on Hon Hai shares and left its target price of NT$135 unchanged, said an increase in iPhone X production could boost the Taiwanese firm’s sales for the fourth quarter by 40 percent from the previous quarter to NT$1.512 trillion.
However, another U.S. brokerage said while Hon Hai’s sales growth momentum will pick up in the fourth quarter, higher operating costs could continue to weigh on its profit margins. The brokerage said Hon Hai’s profit margins are unlikely to stabilize until the first quarter of next year, as a result of which it cut its target price on the stock to from NT$106 to NT$105.
A third U.S. brokerage raised concerns that Pegatron Corp. (和碩), a Taiwanese assembler of smaller iPhones, is likely to secure orders from Apple to roll out larger iPhones next year, which could impact Hon Hai’s market share.
The brokerage said it has left unchanged its “neutral” rating and a target price of NT$105 on Hon Hai shares.
CNA cannot identify the brokerages because media outlets in Taiwan are not allowed to report the names of foreign brokerages when they give price forecasts for specific stocks and fluctuations in the index.
By Jeffrey Wu and Frances Huang