Hon Hai Beats Estimates as China Factories Cut Costs

Hon Hai Precision Industry Co. (2317), the Taiwan-based assembler of Apple Inc.’s iPhones and iPads, posted second-quarter profit that beat analyst estimates as it lowered costs by building factories in inland China.

Net income rose 41 percent to NT$17 billion ($567 million) from NT$12 billion a year earlier, according to a company statement yesterday. The average of 14 analyst estimates compiled by Bloomberg was for profit of NT$15.5 billion.

Hon Hai sales have gained on stronger demand for non-Apple products while the second half may see the release of new versions of the iPad and iPhone. The company also has taken advantage of a Chinese government policy to spur investment in inland regions by boosting operations in western Sichuan and central Henan provinces.

“The profit numbers reflect lower costs as its move of plants to inland China has helped reduce labor costs,” said Michael On, president of Beyond Asset Management Co. in Taipei. “The second half should be better as Apple (AAPL) will introduce new products.”

Apple will unveil a new iPhone at a Sept. 10 event, according to a person familiar with the plans. New iPad models, including one with a thinner body design and an iPad mini with a high-resolution screen, will be unveiled later, two people said.

The updates will enable Apple to present a refreshed lineup of its top-selling products to consumers ahead of the year-end holiday shopping season. The iPhone and iPad accounted for almost 70 percent of the company’s sales last quarter.

Revenue Gains

Hon Hai shares were unchanged at NT$79.10 as of the close of trade in Taipei. The stock has dropped 11 percent this year, trailing a 3.3 percent gain in the benchmark Taiex index.

Hon Hai revenue for the period rose 0.4 percent to NT$896 billion, the company said. The company, founded by billionaire Chairman Terry Gou 39 years ago, doesn’t provide earnings forecasts.

Third-quarter revenue may climb 14 percent to NT$995 billion, according to the average of 17 analyst estimates compiled by Bloomberg.

Second-quarter gross profit margin, a measure of sales less earnings, narrowed to 5.8 percent in the second quarter from 6.1 percent a year earlier, the company said.

Profit Guarantee

Hon Hai’s board also approved $66.3 million in new investments in China, according to stock exchange statements yesterday. The company will add to an existing investment in a solar products maker and will set up two units that make biodegradable plastic materials.

Gou told investors in June he can “guarantee” that profit this year will climb, even as the company’s goal of 15 percent annual revenue growth became “challenging.” Gou plans to spin off businesses such as cables, connectors and nanotech to focus on making and assembling smartphones, tablets, game consoles and PCs.

Hon Hai also supplies Sony Corp., Hewlett Packard Co. and Acer Inc. (2353), according to data compiled by Bloomberg. Tokyo-based Sony is releasing new smartphones and is preparing to put its PlayStation 4 game console on sale before the end of the year.

Sales and earnings at Hon Hai benefit from Hong Kong-listed contract phone manufacturer FIH Mobile Ltd. (2038), of which Hon Hai owns about 70 percent, returning to profit. FIH, previously called Foxconn International Holdings, said Aug. 12 it had a profit of $17.7 million in the first half compared with a loss of $226 million a year earlier.

Innolux Corp. (3481), Hon Hai’s display-making affiliate, posted second-quarter profit of NT$4.1 billion, it said Aug. 8, after a NT$9.56 billion loss a year earlier.

Hon Hai is rated the equivalent of buy among 17 of the 29 analysts tracked by Bloomberg. Seven recommend investors hold and five say sell.

To contact the reporter on this story: Yu-Huay Sun in Taipei at ysun7@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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