HONG KONG -(Dow Jones)- Shares in Foxconn International Holdings plunged 20% in early Hong Kong trade after the company warned late Friday its profit for the six-months ended June 30 fell significantly from a year earlier due to changes in product mix and rising operational costs.
Analysts said Foxconn, which makes mobile phones and other consumer electronics for clients such as Nokia and Motorola, isn't likely to see a major turnaround in earnings during the second half of this year as the company grapples with a slowdown in handset demand from the weak global economy.
Typically demand for handsets and other electronic goods rises in the second half of the year spanning the back-to-school and holiday shopping season.
"Although there will be a mild improvement in demand in the second-half due to strong seasonality, 2008 will still be a poor year for Foxconn and other contract handset manufacturers," said Charles Guo, an analyst at JP Morgan.
At the midday break, Foxconn shares were down 20% at HK$6.18, underperforming the benchmark Hang Seng Index, which fell 1.2%. Foxconn didn't give any earnings estimates for the first half in its statement Friday. It posted a net profit of US$324.0 million in the first half of 2007.
Guo expects Foxconn's net profit to fall 8% this year to US$660 million from US$721 million in 2007.
He has a "neutral" rating on Foxconn, with a 12-month price target of HK$8.00.
JP Morgan said global handset original equipment manufacturers are facing declining profitability due to a higher mix of low-price models as well as increasing competition in the high-end segment especially in Western Europe.
HSBC analyst Christine Wang wrote in an Aug. 13 report that she expects a weaker second half for handset manufacturers in Asia, with only a 2% quarter-on-quarter rise in shipments in the third quarter compared with a high single-digit historical increase.
"We still don't know how bad (Foxconn's first half result) is. It could be worse than expected. We expect there will be more earnings downgrades across the board after its results come out Aug 27," said Wang, who cut Foxconn's target price to HK$10.00 from HK$16.00 recently and has an "overweight" rating.
The Taiwan-based blue chip company said in June it expects its gross profit margin to fall this year because of a price war as well as higher costs and corporate taxes in China.
Foxconn said at the time it will continue to migrate its production facilities to low-cost sites internationally and invest aggressively in automation to minimize the decline in its gross profit margin.
Foxconn's weak performance also dragged down shares in some of its peers in Asia as it raised concerns about a weaker-than-usual second half.
In Taiwan, shares of Foxconn's parent, Hon Hai Precision Industry, fell 3.6% to NT$162.5.
Hon Hai is the world's largest contract maker of electronics by revenue.
Shares in Taiwan's Compal Electronics fell 3% to NT$30.35, while Quanta Computer was down 0.8% at NT$45.65. Both companies make notebook computers on a contract basis. Chang Chihming, an investor relations officer at Compal, said the company hasn't seen a slowdown in demand so far in the third quarter.
"We are not as affected as the handphone business. I can already see back-to-school demand and Christmas demand," said Chang, adding that the company expects third-quarter shipments to improve 20% from the second quarter.
HSBC analyst Wanli Wang said the market for handsets is weak, but he doesn't expect this to impact Hon Hai significantly as the company is seeing strong orders for desktop computers as well as game consoles.
18th August 2008
