Hon Hai Posts Record Profit on IPhone Sales, Declining Costs

Hon Hai Precision Industry Co. (2317), the world’s largest contract manufacturer of electronics, posted record quarterly profit as sales of Apple Inc. (AAPL)’s iPhones and iPads climbed and costs for relocating factories dropped.

Fourth-quarter net income climbed 64 percent to NT$35 billion ($1.18 billion) from NT$21.4 billion a year earlier, according to an e-mailed statement from the Taipei-based company today. Profit beat each of the nine analysts’ estimates compiled by Bloomberg, and the average NT$26.6 billion.

Hon Hai, flagship of the Foxconn Technology Group, benefited from better-than-expected sales of Apple’s handheld devices while costs for relocating manufacturing to inland China decline as construction is completed. A new iPad, rising sales of iPhones and a rebound in the computer market could be offset by higher costs this year as the company continues to boost wages amid labor inspections.

“Apple was a strength with the release of the new iPhone while relocation expenses have already peaked and are now declining,” said Hong Kong-based Gokul Hariharan of JPMorgan Chase & Co., who rates Hon Hai overweight and is the second-best ranked of 24 analysts tracked by Bloomberg. “The turnaround at unit Foxconn International Holdings also helped boost their bottom line.”

Record Sales

Consolidated sales climbed 13 percent to a record NT$1.07 trillion for the quarter, according to data compiled by Bloomberg. Full-year consolidated sales rose 15 percent to NT$3.45 trillion, and net income grew 5.8 percent to NT$81.6 billion, Hon Hai said in an exchange filing today.

Founder Terry Gou cut his annual sales-growth forecast in September 2010 to 15 percent from a 30 percent target that had been in place for more than a decade as Hon Hai’s size burgeoned. Revenue growth will be no less than 15 percent this year, driven by China and Brazil, he said Dec. 1.

Apple, which outsources its iPad assembly, most of its iPhones and some of its MacBooks to Foxconn, posted record revenue for the quarter ended Dec. 31 with 15.4 million iPads sold, exceeding analyst estimates for 13.5 million units.

Foxconn International Holdings Ltd. (2038), the Hong Kong-listed maker of phones for Nokia Oyj (NOK1V) that’s majority owned by Hon Hai, last week reported 2011 profit of $72.8 million, almost triple the $24.5 million average of analyst estimates, after posting a loss of $218.3 million a year earlier.

Margin Improvement

Slowing labor supply and increased government incentives prompted Gou to begin expansion in central China, away from Hon Hai’s main production base on the east coast and closer to its workforce, a move that raised costs and cut profit margins.

“We are positive on Hon Hai’s progress in margin improvement,” Kirk Yang, who rates the stock overweight at Barclays Bank Plc in Hong Kong, wrote in a March 7 report. “Relocation to inland China should be gradually completed this year, which means no more duplication of manpower and facilities.”

Improved efficiency in making iPads and iPhones, incentives and tax credits from the Chinese government and easier access to labor inland will also help boost Hon Hai’s profits this year, Yang wrote.

Foxconn raised base wages by up to 25 percent in February, the company said in a Feb. 17 statement, doubling the salary of a junior worker in Shenzhen to 1,800 yuan ($285) a month from 900 yuan three years ago.

Foxconn’s factories were audited by the Fair Labor Association last month after Apple joined the Washington-based human rights group. The manufacturer has “tons of issues” while dramatic improvements have been made, FLA Chief Executive Officer Auret van Heerden said in an interview last month.

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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