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May 26, 2017

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FIH Mobile shares downgraded on shrinking Sony & Nokia sales

TAIPEI -- Morgan Stanley has downgraded its rating on FIH Mobile Ltd. (富智康), a contract handset maker and a unit of Taiwan's Hon Hai Precision Industry Co. (鴻海), due to the shrinking sales of two major clients and China's slowing smartphone momentum.

Morgan Stanley downgraded FIH to "equal-weight" from "overweight" and trimmed its price target to 5 Hong Kong dollars (US$0.65) from 6 Hong Kong dollars, after lowering FIH's earnings per share estimates for 2014 by 12 percent and for 2015 by 16 percent.

"Our earnings cuts are mainly to reflect reduced sales from tier two global brands (Nokia/Sony) and lengthier 3/4G model transition among China OEMs (Original Equipment Manufacturers)," Jasmine Lu, a Morgan Stanley analyst in Taipei, wrote in a research note dated Aug. 8.

Lu said that at a time when Sony and Nokia are experiencing sales declines, FIH's penetration of new clients in fast-growing emerging markets such as India and Indonesia is also progressing slower than she expected because smartphone adoption in these countries has yet to really take off.

Moreover, FIH's production of 4G models for Chinese handset brands has been delayed by at least one quarter in light of slowing demand in China, resulting in a longer product transition period that could cap FIH's earnings momentum, Lu said.

Morgan Stanley's downgrading of FIH came after Sony's recent downward revision of its 2014 global smartphone shipment target from 50 million to 43 million units.

Microsoft Corp. announced last month that it will cut up to 18,000 jobs over the next year as it works on integrating the Nokia device business it bought in April.

Analysts believe the software giant's decision will come at the expense of Nokia's non-strategic feature phone business and affect Nokia's outsourcing orders to FIH.

FIH shares fell 0.91 percent to 4.36 Hong Kong dollars Monday in Hong Kong.

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