After reporting disappointing results for last year, the world's biggest contract handset manufacturer Foxconn International Holdings is looking to build up orders from Nokia Corp and Samsung Electronics amid intensifying competition against BYD Electronic (International).
'We are keenly aware of increased competition in the handset manufacturing business and complexity due to consumer demand changes and emergence of new technologies,' said Samuel Chin Wai-leung, chairman and chief executive at Foxconn in Hong Kong.
Hong Kong-listed Foxconn had reported a meagre 0.4 per cent net profit growth to US$721 million last year from US$718 million in 2006.
The operating arm of Taiwan-based Hon Hai Precision Industry saw a modest 3.4 per cent growth in total sales last year to US$10.73 billion, as opposed to a 63 per cent increase to US$10.38 billion in 2006, when net profits surged 86 per cent.
Foxconn's revenue from Asia, which accounted for 53.6 per cent of total sales last year, fell 10.5 per cent to US$5.76 billion. This decline was offset by a 26 per cent growth in sales to Europe and North America.
According to estimates from Thomson Financial, Foxconn was expected to record an 8.8 per cent increase in net profit last year to about US$781 million based on a projected 7.5 per cent growth in sales to US$11.16 billion. Market concerns mainly focused on the slowdown in Foxconn's growth rate instead of the declining gross margin, which dropped to 9.17 per cent last year from 9.36 per cent a year ago on rising labour costs.
JP Morgan maintained a 'sell' recommendation for Foxconn shares and is considering lowering the profit forecast because of intensifying competition in the Asia-Pacific region.
'The challenge from rivals such as BYD Electronic, which has just set up a new factory in India, will continue to increase and hurt Foxconn's growth rate,' a JP Morgan report said.
Hong Kong-listed BYD Electronic's sales in Asia last year jumped 77.6 per cent to 3.79 billion yuan, while sales in Europe and North America shot up 117 per cent to 1.98 billion yuan.
Besides competing for contract-manufacturing orders, Foxconn and BYD Electronic are still locked in a legal battle.
In June 2006, Foxconn filed a lawsuit against BYD Electronic in the Intermediate People's Court in Shenzhen, charging that the rival knowingly and intentionally bought confidential data from its former employees. Last March, the company withdrew the civil action after the Shenzhen Public Security Bureau commenced criminal investigation.
On April 11, BYD said Xia Zuo-quan, one of its founders and a former vice-president, was detained by Shenzhen Public Security Bureau on March 21 and released on March 24 to assist with an investigation.
Analysts said gaining more orders from Nokia and Samsung seems to be the only way for Foxconn to boost revenue since the corporate restructuring at Motorola, another major client, is expected to drag on.
Motorola, the world's third-largest handset supplier after Nokia and Samsung, last year reported a net loss of US$49 million, from a net profit of US$3.66 billion in 2006, as sales fell 14.5 per cent to US$36.62 billion.
Foxconn's percentage of total sales attributable to Motorola last year narrowed to 40 per cent from 59 per cent in 2006. Meanwhile, Nokia's proportion rose to 40 per cent from 32 per cent the year before.
'We project the sales mix from Motorola to further drop this year to only 25 to 26 per cent,' said Morgan Stanley analyst Jasmine Lu. She reiterated an 'overweight' rating with a target price of HK$16 on Foxconn's shares, saying the share price was only 12.6 times of projected earnings for this year, making the stock undervalued and attractive.
Ms Lu expected Foxconn sales this year to climb 24 per cent to reach US$13.33 billion and its net profit to grow 10.3 per cent year on year to US$795 million.
Foxconn shares yesterday closed 5.3 per cent up to HK$11.92 while BYD rose 0.7 per cent to HK$13.5.