Hon Hai Falls to Nine-Month Low on Analyst Downgrades

Founder and Chairman of Hon Hai Group Terry Gou
Founder and Chairman of Hon Hai Group Terry Gou is surrounded by the media at the company's Foxconn plant in Shenzhen. Photographer: Qilai Shen/Bloomberg

Hon Hai Precision Industry Co. fell to the lowest in more than nine months after two brokerages downgraded the Apple Inc. supplier on concern that its plan to double wages at its southern China factories will hurt earnings.

Hon Hai, the world’s largest electronics contract manufacturer, slid 5.1 percent to NT$111.50 at the close in Taipei, the lowest since Aug. 31. The stock was cut to “neutral” from “outperform” by Macquarie Group Ltd. analyst Daniel Chang and lowered to “underperform” from “buy” by Daiwa Securities Group Inc. analyst Calvin Huang.

“Hon Hai could face a further de-rating given slower earnings growth and challenges ahead,” Chang said in a report today. “It is too late for Hon Hai to change its business model given the size of its business. With nearly 800,000 workers we believe Hon Hai has become too big to manage but not too big to fail.”

The Taipei-based company will raise base salaries at its Shenzhen factories to 2,000 yuan ($293) a month in October from 900 yuan in May. At least 10 workers have killed themselves this year, prompting labor-rights groups to call the company a “sweatshop” that doesn’t pay employees enough to avoid overtime.

Hon Hai Chairman Terry Gou told investors today at the annual shareholders meeting in Taipei that he plans to boost automation at the company’s factories to combat wage increases. He said he hasn’t spoken to customers about the higher salaries and he expects them to understand. Edmund Ding, a spokesman at the company, wasn’t immediately available to comment.

Higher Pay

Hon Hai Group, also known as Foxconn, will boost monthly pay for most first-line workers, their line managers and supervisors to 2,000 yuan from 1,200 yuan effective Oct. 1, the company said in an e-mailed statement over the weekend. On June 2, the electronics maker raised base salaries from 900 yuan.

Daiwa, which cut its share-price estimate for Hon Hai NT$105 from NT$144, said in a report received today that the second wage increase will cost the company as much as NT$16 billion ($494 million) next year, three times the NT$5 billion added expenses the brokerage estimated for 2010.

Hon Hai’s share-price estimate was also lowered to NT$173 from NT$189 by Credit Suisse Group AG analyst Robert Cheng and to NT$140 from NT$180 by BNP Paribas analyst Patty Liu.

The company posted record first-quarter profit on April 29 after global sales of electronics and PCs climbed. First-quarter unconsolidated net income climbed 35 percent to NT$18 billion from NT$13.3 billion a year earlier.

Cost Advantage

Credit Suisse said it kept its “outperform” rating on the stock because Hon Hai still has a cost advantage over its peers, while BNP maintained its rating at “buy” on expectations the end customers will eventually pay for the higher costs. Hon Hai is also “smart” to increase wages early to secure quality workers for the peak season in the fourth quarter and ahead of the Lunar New Year in February, BNP said.

At least 10 workers at Hon Hai’s southern China factories have died from suicide, five during May, according to the company. The deaths prompted Gou to open factories to the media and apologize. The chairman said today most of the workers who committed or attempted suicide had personal troubles involving romantic relationships or family, or had psychological problems. Foxconn also said the deaths were exacerbated by compensation packages offered to the families of victims.

Honda’s China Strikes

Honda Motor Co. suffered its second strike in China in less than a month as workers at a plant partly owned by affiliate Yutaka Giken Co. walked out demanding higher pay, forcing the parts maker to close the factory. Yutaka Giken said employees at Foshan Fengfu Autoparts Co. began the strike yesterday.

Merry Electronics Co. said workers at its factory in the southern Chinese city of Shenzhen ended a protest on June 6 afternoon after the company agreed to increase monthly wages by 10 percent starting July. Some workers staged a protest on June 6 morning demanding a pay increase, Tseng Chin-tang, a spokesman at the Taichung, Taiwan-based company said by telephone today. Merry Electronics hires 6,000 workers at its Shenzhen factory and pays an average monthly salary of 950 yuan, Tseng said.

For Hon Hai, workers will receive the higher base wage after passing a three-month evaluation period, Hon Hai said. Further pay raises for current line-leaders and supervisors will be determined by Aug. 1, while wage increases for factory workers in other parts of China will be determined according to local conditions and announced from July 1, it said.

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