Hon Hai Profit Gain Accelerates on Efficiency, Yuan Fall

Hon Hai Precision Industry Co. (2317), the largest company in Foxconn Technology Group, posted its fastest profit growth for the industry’s traditional low season in four years as it boosted efficiency and gained from a fall in the Chinese yuan.

First-quarter net income climbed 20 percent to NT$19.5 billion ($647 million), according to company data filed to the Taiwan Stock Exchange yesterday, in line with the NT$19.6 billion average of 12 analysts’ estimates compiled by Bloomberg.

A return to profit at Hon Hai’s display and handset units, and a weaker Chinese currency, helped offset sales that missed analyst estimates during the post-Christmas low season. The supplier to Dell Inc., Hewlett-Packard Co. (HPQ) and Apple Inc. (AAPL) is also benefiting from improved operational efficiency for current and future products.

“This is overall a slightly positive result because operating efficiency and margins improved even with the weaker sales,” said Vincent Chen, who recommends buying the stock at Yuanta Financial Holding Co. in Taipei. “They gained because a lot of costs are in yuan while sales are mostly in U.S dollars.”

The company reported last month that revenue climbed 9.2 percent to NT$883 billion, missing the NT$955 billion average of analysts’ estimates.

Foxconn Technology Group employs more than one million people in China to assemble devices largely for Western clients, which means its labor costs are mostly in the Chinese currency while prices are negotiated in U.S. dollars.

Yuan Fell

China’s currency fell 2.7 percent against dollar during the quarter, according to data compiled by Bloomberg. Hon Hai’s operating margin was 2.4 percent for the period according to Bloomberg calculations, compared with 1.7 percent a year earlier.

Hon Hai yesterday also said it plans to pay a cash dividend of NT$1.8 per share for last year, the largest cash payout in five years and more than the Bloomberg dividend forecast of NT$1.7 per share.

Apple, which contracts Hon Hai to make iPhones and iPads, posted sales for the quarter that surpassed estimates during the industry’s traditional post-Christmas low. Hon Hai probably received most of its revenue from those devices in the prior period, meaning they had a lower contribution to sales in the first quarter, Yuanta’s Chen said.

Hon Hai, founded by billionaire Chairman Terry Gou 40 years ago, doesn’t provide earnings forecasts, hold analyst meetings or explain its financial results.

Innolux Corp. (3481), Foxconn’s display-making unit, posted a NT$153 million profit for the period, beating estimates for a NT$2.13 billion loss. FIH Mobile Ltd., its Hong Kong-listed handset affiliate, in March posted annual profit that surpassed analyst estimates after a net loss a year earlier.

NRE Expenses

Hon Hai often faces one-time costs, called non-recurring engineering expenses, that can weigh on earnings ahead of each new Apple device, said Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein. Improved margins indicate the company could be controlling those costs better, he said.

“Hon Hai is getting better and more efficient at engineering ahead of new products so they may be benefiting ahead of the next iPhone release,” Moel said.

Hon Hai shares rose 0.3 percent to NT$88.20 at the close in Taipei trading before the earnings announcement. The stock’s 10 percent advance this year outpaces a 3.1 percent gain in the benchmark Taiex (TWSE) index.

Gross Margin

First-quarter gross margin, a measure of sales less the cost of goods sold, widened to 6.0 percent from 5.8 percent a year earlier, according to Bloomberg calculations, missing the 6.1 percent average of 10 analyst estimates compiled by Bloomberg. Operating profit, which also accounts for sales, general and administration expenses, was NT$20.9 billion, compared with the NT$21.3 billion average of 10 analyst estimates.

The company also said yesterday it plans to invest $610 million into China’s Chengdu, Jiyuan and Tianjin regions for its tablet, mobile and data center businesses.

Hon Hai is rated the equivalent of buy among 21 of 29 analysts surveyed by Bloomberg. Five recommend investors hold and three say sell.

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Mark Beech, Robert Valpuesta

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