Hon Hai Net Climbs on Efficiency Gains, Reversed Charged

Hon Hai Precision Industry Co. (2317), the world’s largest contract manufacturer of electronics, posted a bigger-than-expected profit as investment losses were overturned and Apple Inc. (AAPL) paid more for the iPhone’s manufacture.

Third-quarter net income climbed 58 percent to NT$30.3 billion ($1 billion), according to Bloomberg calculations based on nine-month results filed to the Taiwan Stock Exchange yesterday evening. The average of 13 analysts’ estimates compiled by Bloomberg was for a profit of NT$23.4 billion.

Hon Hai, the Taipei-listed flagship of Foxconn Technology Group, benefited from a reversal of losses on a planned investment in Sharp Corp. and improved efficiency at new plants. Increased payments from Apple helped offset the difficulty of making its iPhone 5 that led to labor unrest and product shortages.

“Apple’s subsidies to Hon Hai were key to them improving profits for the quarter given how complicated the new model has been to produce and the fact they made about the same amount of iPhones as the previous quarter,” said Vincent Chen who upgraded the stock to buy from hold at Yuanta Financial Holding Co. in Taipei. “Continued generosity from Apple is unclear and would be a factor in Hon Hai’s profitability this quarter.”

Stock Gains

Shares of Hon Hai added 1.8 percent to NT$89.60 as of 12:23 p.m. in Taipei, the highest in almost a month, while the benchmark Taiex (TWSE) fell 0.2 percent. The stock has climbed 19 percent this year, outpacing the Taiex’s 1.4 percent advance.

Parent-level sales climbed 6.8 percent to NT$711 billion, according to data compiled by Bloomberg. Nine-month net income rose to NT$57.8 billion on parent revenue of NT$2.23 trillion, the company said in an exchange filing.

Foxconn in August raised pay more than 16 percent, halved the probation period for new workers and offered a peak-season bonus equal to 11 percent of base salary at its factory in Zhengzhou in north-central China that assembles iPhones. Those increases were funded by Apple, Yuanta’s Chen said.

An Apple quality-control crackdown aimed at cutting the number of iPhone 5s shipped with scratches reduced output and led to disputes between production and quality-assurance workers, a person familiar with the matter told Bloomberg News this month.

Workers went on strike and output was halted as manufacturing employees protested the tighter rules and quality- control teams were instructed to enforce the tougher standards.

More than 5 million iPhone 5s were sold in the opening weekend of sales, which started Sept. 21, Apple said last month. Demand exceeded supply, it said at the time.

Apple Forecasts

Apple, which contracts Foxconn to make its iPhones and iPads, reported a gross margin last week of 40 percent for the three months through September, its lowest in seven quarters, an indication it’s paying more for components and assembly. Apple’s revenue and earnings-per-share forecasts for this quarter fell short of analysts’ estimates.

“Despite initial low yields and augmented overheads, we think Hon Hai might have passed on incremental costs to Apple who recognizes time-to-market/volume more than pricing,” Jasmine Lu and Po-ling Chen, Taipei-based analysts who rate the stock overweight at Morgan Stanley wrote in a report today. The results are “a sign of enhanced bargaining power.”

Foxconn Technology Group, which includes mobile-phone casing maker Foxconn Technology Co., Hong Kong-listed handset supplier Foxconn International Holdings Ltd. (2038) and display manufacturer Chimei Innolux Corp. (3481), has 1.4 million workers globally, including 1.2 million in China.

Dell, Nintendo

In addition to making devices for Apple, computers for Dell Inc. and Hewlett-Packard Co. and games consoles for Nintendo Co. and Sony Corp., Hon Hai is developing televisions to be sold globally at cheaper prices than competitors.

“The uptrend is due to better vertical integration, as Hon Hai is making more components in-house, and better production scale,” Birdy Lu, who rates the stock buy at Daiwa-Cathay Capital Markets Co. in Taipei, wrote after the results yesterday. “We believe Hon Hai might deliver record-high top- line and bottom-line results in 4Q12.”

Hon Hai’s third-quarter earnings were boosted by the reversal of a previously-booked NT$4.5 billion loss on its planned acquisition of a 6.6 percent stake in Sharp. Hon Hai and Foxconn Technology Co., which planned to buy 3.3 percent, had made a provision for a decline in the value of the Osaka, Japan- based maker of Aquos TVs, which has dropped 69 percent below the originally agreed share price.

China Investment

Rising profit at Foxconn Technology Co. and a narrower loss at Chimei Innolux helped non-operating income during the period. Profitability, including gross margins and operating margins, will be available after the company reports consolidated numbers next month.

Separately, Hon Hai announced plans to invest a total of $375 million in China, including $275 million for a mobile- device facility in Jiyuan, LCD module facilities in Chengdu and Shenzhen and a precision-molding business in Hengyang.

Hon Hai’s directors also approved a plan to sell as much as NT$18 billion in bonds to repay short-term debt, the company said in its statement to the Taiwan exchange.

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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