Hon Hai Precision Industry Co. (2317), assembler of Apple Inc. (AAPL)’s iPhone and iPad, dropped by the daily limit in Taipei trading after posting first-quarter profit that missed analysts’ estimates.
The stock fell 7 percent, the biggest decline since November 2008, to close at NT$92.40. The Taipei-based company on April 28 posted net income of NT$14.9 billion ($510 million), about 31 percent less than the NT$21.5 billion average of 10 analysts’ estimates compiled by Bloomberg.
Hon Hai, flagship of the Foxconn Technology Group, was downgraded at UBS AG and Fubon Financial Holding Co. which cited worse-than-expected profit margins amid wage increases and losses at its Hong Kong-listed unit. Hon Hai’s profitability usually moves in the opposite direction to that of Apple, which posted its highest operating margin in over a decade.
“Hon Hai’s margins from making Apple products weren’t as high as in previous quarters, due in part to lower yields for the New iPad,” said Arthur Liao, who downgraded the stock to add from buy at Fubon Financial in Taipei. Losses at unit Foxconn International Holdings Ltd. (2038) may also have hurt earnings, said Liao, who reduced his share price forecast to NT$120 from NT$150.
Shares opened at its lower limit and stayed there throughout trading, while the benchmark Taiex (TWSE) index added 0.3 percent. The stock has added 11 percent this year, beating a 6 percent advance in the benchmark.
Foxconn International, the Hong Kong-listed phone manufacturing affiliate 72 percent owned by Hon Hai, last week said its first-half loss will widen “significantly” because of weaker demand from customers and higher costs. Foxconn International makes phones on contract for Nokia Oyj (NOK1V) and isn’t an Apple supplier.
Hon Hai, which gets 37 percent of its revenue from Apple according to data compiled by Bloomberg, usually posts smaller earnings margins when the maker of iPods lifts profitability.
Apple’s gross margin widened to 47 percent, its highest on record, while operating margin climbed to 39 percent during the March quarter.
Customers have agreed to cover the cost of higher salaries, Chairman Terry Gou told Bloomberg News April 28 before the earnings announcement without naming the clients. Foxconn’s planned migration of production capacity from Eastern China to the interior of the country is about 60 percent complete, he said.
Arthur Hsieh, an analyst at UBS, cut Hon Hai to sell from buy and reduced his share price forecast by 25 percent, citing “slower than expected margin recovery.”
Gross margins, which measure revenue less the cost of goods sold, will gradually rebound throughout this year, Chief Financial Officer Huang Chiu-lian said April 28 before the earnings announcement, without providing a target for the metric.
Hon Hai also reported plans to offer stock options to employees which it estimated will equal NT$2.99 billion annually in amortized expenses, or a dilution NT$0.28 in earnings per share. The company reported basic EPS of NT$7.65 last year.
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