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HTC may consider outsourcing orders: J.P. Morgan report

TAIPEI -- HTC Corp. might outsource its smartphone orders to Taiwanese contract makers in a move to ease its financial pressure and target the price-sensitive China market, J.P. Morgan Securities said Wednesday in a report.

The brokerage firm said Chinese companies might be interested in a merger with HTC as a way of upgrading their design capabilities. Attaining profitability in the sub-US$100 segment has become more difficult due to the rise of low-cost Xiaomi phones and “white-box” models — cheaper clones of popular brand-name devices.

However, HTC has become active in engaging Quanta Computer Inc. and Wistron Corp., both original design manufacturers (ODM), in subcontracting the production of mid-range and entry-level phones for the China market, according to Alvin Kwock, an analyst with J.P. Morgan in Hong Kong.

“Thus, we suspect that HTC might not consider a merger scenario right now,” Kwock wrote in the report, in which he maintained an “underweight” rating on the stock with a price target of NT$100 (US$3.38).

The analyst expects HTC's third-quarter sales to reach the low end or fall short of the company's guidance at NT$50 billion-NT$60 billion, as HTC has limited flexibility for cutting its prices to compete against other Android phones, leading to a shorter-than-expected life cycle for its flagship phone, the HTC One.

To limit the magnitude of loss, Kwock believes HTC must cut back on its operating expenses and marketing budget, making a recovery in coming quarters even tougher for the Taiwanese firm.

“We also believe that the financial loss may continue but will not be enough to create financial stress, although this could change when a bigger iPhone arrives,” he said.

Annual Smartphone Shipments May Drop 56 Percent

Local media has cited supply chain sources as saying that HTC's annual smartphone sales might fall below 20 million units this year, a sharp decrease from about 45 million units in 2011 and about 32 million units last year.

Taiwan's Commercial Times daily reported Sept. 15 that the production line at HTC's Taoyuan factory in northern Taiwan was operating only three days a week, but this was denied by HTC the following day.

In a July 30 conference call with investors, HTC said its overall gross margin had been impacted by the relatively higher cost structure, lack of economy of scale and certain provisions needed to facilitate the clearance of aging products in the channel.

Peter Chou, chief executive officer of HTC, said the company has been taking action to reduce the cost of some key components used in its products, such as displays and mechanical parts, and that the improvements will be apparent in the fourth quarter.

Chang Chia-lin, HTC's chief financial officer, added that the company is still growing in China's high-end phone segment with prices of over 4,000 Chinese yuan (US$654) while facing challenges in the 1,500-2,500 yuan phone segment, which is crowded with local handset makers.

HTC shares ended 0.74 percent lower at NT$134 Thursday in Taipei.

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