Hon Hai Quarterly Net Misses Estimates on Investment Losses

Hon Hai Precision Industry Co., the world’s largest contract manufacturer of electronics, posted profit that missed analyst estimates as investment losses and a lull in Apple Inc.’s iPhone sales damped earnings.

Second-quarter net income was NT$12.6 billion ($421 million), 2.9 percent less than a year earlier, according to Bloomberg calculations based on first-half earnings reported today. That missed the NT$14.6 billion of 13 analysts’ estimates compiled by Bloomberg.

Hon Hai posted a writedown from its planned investment in Sharp Corp. while losses at its Hong Kong-listed handset affiliate Foxconn International Holdings Ltd. widened 12-fold. The company said today it reversed the provision for losses on the Sharp deal as of July 31 because it wasn’t approved by local authorities.

“FIH’s loss really dragged them down and they suffered from a lull in the cycle between the old iPhone and the new,” Kirk Yang, who rates Hon Hai overweight as managing director for technology research at Barclays Plc in Hong Kong, said before the earnings announcement.

Second-quarter consolidated sales rose 13.7 percent to NT$893 billion, according to data compiled by Bloomberg. First-half net income was NT$27.5 billion, from NT$27.4 billion a year earlier on a 25 percent increase in sales to NT$1.89 trillion, it said in an exchange filing today.

Loss Provision

Hon Hai and its computer-case making affiliate Foxconn Technology Co. in March announced plans to buy a combined 9.88 percent stake in Sharp for 66.9 billion yen ($851 million) to give it access to display and electronics technology.

The Taiwanese company said its first-half results include provision for losses of NT$4.5 billion because of its planned investment in Sharp. As the deal wasn’t approved by the local authorities, Hon Hai reversed the provision as of July 31, the company said in a statement today. The deal has no impact on Hon Hai’s finances as of July 31, it said.

Hon Hai owns about 70 percent of Foxconn International, as well as stakes in Foxconn Technology Co. and Chimei Innolux Corp.

Foxconn International, which makes handsets for Nokia Oyj and Research In Motion Ltd. and doesn’t supply to Apple, on Aug. 27 reported a first-half loss of $226 million and said it sees “tremendous challenges” in returning to profitability this year.

Chimei Innolux earlier this month posted a second-quarter loss of NT$9.57 billion. Foxconn Technology Co. last night posted a loss of NT$2 billion.

Shares Decline

Hon Hai shares fell 0.8 percent to NT$84.80 at the close in Taipei trading before the earnings were announced. The stock has added 13 percent this year, outpacing a 4.6 percent climb in the benchmark Taiex index.

Apple, which contracts Hon Hai to make its iPad and iPhone, on July 24 posted profit and sales that fell short of analysts’ projections as customers held off on purchases while waiting for a new model to be released.

Revenue will drop this quarter from the prior period, the Cupertino, California-based designer of iPods and Macs said. Gross margin fell from the prior period and will decline again this quarter, it said. Hon Hai’s margins have widened in the past when Apple’s narrowed, data compiled by Bloomberg show.

Hon Hai, the flagship of founder Terry Gou’s Foxconn Technology Group, boosted capital expenditure to a record NT$92 billion last year as it shifted production to inland China, closer to the hometowns of its 1.2 million-strong workforce.

Sharp Meetings

Results of interim inspection by the Fair Labor Association published this month showed the company ahead of schedule in improving conditions while finding that work hours continue to exceed targets and legal mandates. Foxconn this month also raised wages in Zhengzhou, Henan Province which hosts an iPhone factory, and said it would pay an additional high-season bonus.

Gou, who traveled to Japan this week to meet industry executives, is looking to Sharp to boost Foxconn’s technology and capacity for making displays. The Osaka-based maker of screens, TVs and white goods, seeks funds to pay off debt after widening its loss forecast eightfold for the current year.

Net income will be NT$19.8 billion this quarter on consolidated sales of NT$977 billion, according to the average of 12 analysts’ estimates compiled by Bloomberg. Thirteen of 27 analysts surveyed by Bloomberg rate the stock buy while four recommend investors sell it.

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