Citigroup is maintaining its bearish view on Taiwan’s notebook supply chain, citing increased pricing pressure from major computer brand Hewlett-Packard Co (HP), which reported lackluster first-quarter earnings results last week.
On Wednesday, HP reported a profit of US$1.9 billion on US$28.8 billion in sales, up 1.2 percent from last year, but 10 percent below analysts’ expectations, for the first quarter ending on Jan. 31.
Revenues from HP’s personal systems group fell 18.6 percent in the first quarter to US$8.79 billion. Notebook and desktop sales were down 13.4 percent and 25 percent to US$4.91 billion and US$3.3 billion respectively.
With no economic recovery in sight, the word’s largest computer maker also lowered its sales forecast for this quarter, predicting a decline of 2 percent to 3 percent in the second quarter from a year earlier.
As a result, Citigroup analyst Eve Jung (戎宜蘋) said in a client note on Friday that Inventec Co (英業達) would suffer because of the company’s high exposure to HP.
In comparison, Compal Inc (仁寶) and Wistron Corp (緯創) would remain relatively unharmed, she said in the note.
Inventec, Quanta Computer Inc (廣達), Compal and Wistron are the nation’s top four contract PC makers. Citigroup research showed that their exposures to HP would account for about 50 percent, 28 percent, 20 percent and 18 percent of expected notebook shipments for this year respectively.
While HP might try to cut panel and dynamic random access memory prices to cut costs, the Palo Alto, California-based company might not succeed as average selling prices on these components have already hit bottom and several component makers are in dire financial distress, Jung said.
Therefore, the next logical choice would be for HP to turn up the pressure on local original design manufacturers and further drag down their margin trends this year. Compal and Wistron, which typically have high expenses for research and development and administration, may have less room to cut operating expenses response to HP’s pricing squeeze, she wrote.
The Citi analyst sees increased earnings downside risk for these companies if end-demand does not pick up.
Citigroup currently has a sell ratings on Compal and Wistron with three-month price targets of NT$18.65 and 26.80, while it maintains a hold rating on Quanta at NT$35.20.
Compal, Wistron, and Quanta all closed lower on Friday at NT$18, NT$26.3, and NT$35 respectively.
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