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September 27, 2017

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Hon Hai to improve operating margins

TAIPEI--Taiwan-based Hon Hai Precision Industry Co. will continue to improve its operating margins despite its pending negotiations with Japan's Sharp Corp., British bank Barclays PLC said recently in a research note.

Hon Hai, which is in talks to acquire a stake in Sharp, said Saturday it is taking concrete steps to help the struggling Japanese display maker improve its bottom line.

The comment came after Tetsuo Onishi, a senior executive managing officer at Sharp, was quoted in Nihon Keizai Shimbun as saying that his company hopes the acquisition talks with Hon Hai will be sped up.

However, Hon Hai Chairman Terry Gou did not show up Thursday at a scheduled news conference in Osaka, at which he was widely expected to announce the conclusion of the acquisition deal.

"Although we are still waiting for more details of the Sharp investment renegotiation, our view has been very consistent during the last few months," Kirk Yang, a Barclays analyst in Hong Kong, wrote in the note.

"This is a non-operating item and has little impact on the near-term operation performance of Hon Hai," he said.

Although Hon Hai booked about NT$4.5 billion (US$150.7 million) in losses over the Sharp investment based on general accounting principles, the write-down did not substantially affect its bottom line.

Hon Hai, the main manufacturer of Apple Inc. iPhones and iPads, reported consolidated sales of NT$892 billion for the second quarter, up 14 percent from a year earlier and 11 percent from the previous quarter.

The company's consolidated operating margin reached 2.4 percent, beating Barclays' estimate of 2 percent and the market projection of 1.6 to 1.7 percent.

This suggested Hon Hai's weak operating margin in the first quarter was a one-time event caused by a wage increase for employees on its Apple production line, higher iPhone 5 product development costs and higher investment losses from Foxconn International Holdings, Yang said.

The strong results in the second quarter reaffirmed Barclays' view that Hon Hai's operating margins should improve in the third quarter and make a big jump in the fourth quarter with iPhone 5 shipments, Yang said.

Barclays maintained its "overweight" rating on the stock and its target price of NT$113, forecasting strong share price performance by Hon Hai on Sept. 3.

In March, Hon Hai and three of its affiliates agreed to buy a 9.9-percent stake in Sharp for 67 billion Japanese yen (US$853 million), or 550 yen per share.

After the announcement, Sharp shares plunged almost 70 percent, hitting a low of 164 yen on Aug. 15 amid concerns over its bottom line.

With the dive in Sharp shares, the two sides decided to renegotiate the terms of the deal, including the acquisition price, but no conclusion has yet been reached.

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