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HTC expected to post quarterly loss next year, Macquarie warns

TAIPEI--Taiwanese smartphone maker HTC Corp. will likely register a quarterly loss after the first quarter of 2013 in light of tougher competition and shrinking margins, Australia's Macquarie Securities warned recently.

HTC predicted at an Oct. 26 investor conference that its revenue will drop to NT$60 billion (US$2.05 billion) in the fourth quarter from NT$70.2 billion in the previous period.

The Taoyuan-based manufacturer forecast its fourth-quarter gross profit margin at 23 percent and operating margin at 1 percent, lower than the 25 percent and 7 percent for the third quarter.

Daniel Chang, an analyst at Macquarie Capital Securities Ltd.'s Taiwan Branch, said HTC is likely to see tougher competition in developed countries where smartphone penetration is already high.

Although Chang believed HTC may launch new flagship models in the first quarter of 2013 to boost its shipments to distributors, the China market should continue to drag on its margin due to the launch of low-cost products and fierce competition.

"Hence, after HTC's sales-to-distributor momentum in the first quarter of 2013, we think HTC may need to face another perfect storm test — and this time, the test will be very tough — and we think it is likely to register a loss," Chang wrote in an Oct. 26 report.

HTC has enjoyed some good momentum in China this year due to its focus on lower-priced phones, Chang said, but there are various Chinese phone makers upgrading their specifications to gain market share.

HTC's archrivals, Apple Inc. and Samsung Electronics Co., are also expected to launch low-cost models in the near term to capture this fast-growing market, he said.

That means HTC is being "sandwiched" in China and its margin there is likely to fall further as competition intensifies, Chang said.

To reflect concerns on the sustainability of HTC's margins, Macquarie cut its target share price for HTC to NT$150 (US$5.13) from NT$220 and held a "underperform" rating.

That was not the deepest cut among foreign brokerages.

French banking group BNP Paribas trimmed its target price for HTC by 57.6 percent to only NT$100 from NT$224m while maintaining a "reduce" rating on the stock, citing the bearish outlook of the Taiwanese handset maker.

With increasing exposure to Asian markets, HTC needs to invest more in marketing and channels, said BNP Paribas analyst Laura Chen.

But HTC's marketing and promotion spending is around 8 to 12 percent of its total sales for 2011 and 2012, which is already higher than Samsung's 5.8 percent, she said.

In addition, HTC's competitors in China are aggressive in product offering and pricing with higher-end features, such as dual-core processors, over 4-inch high-resolution displays and over 5 megapixel cameras thanks to MediaTek Inc.'s solution, Chen said.

"We are worried that HTC's recent strong growth in China will be short lived," she added. "We think HTC's weak economies of scale and difficulty in product differentiation make the company's recovery outlook seem more remote."

Shares in HTC closed 4.84 percent lower at NT$236 in Taipei Friday before the company announced its sales guidance for the fourth quarter.

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