Sunday, January 13, 2008

Taiwan's Quanta Takes off the Gloves

From Barron's:

AS THE WORLD'S LARGEST contract maker of notebook computers, Quanta Computer is used to beating its competitors.

That hasn't been true for the Taiwanese company's shares: They dropped 21% in 2007 as the stocks of local rivals Compal Electronics (ticker: 2324.Taiwan) and Wistron (3231.Taiwan) gained 23% and 32%, respectively. Why? Compal and Wistron cut prices to gain market share, while Quanta (2382.Taiwan) early last year tried to maintain its margins by emphasizing the quality of its work.

But analysts say Quanta has gotten more flexible on its pricing to win new business, and corporate demand for notebook computers has surged, relieving some margin pressure. In the third quarter, Quanta's net profit jumped 36%, to a record, as shipments rose and revenue nearly doubled. The company also upgraded its shipment forecast -- to 36 million notebooks for '08, after selling more than 30 million in '07.

The key drivers for continuing to overcome pricing pressures will be maintaining Quanta's stellar volume growth on notebooks and its success in making non-notebook products like the Apple iPod -- and soon, possibly, a second-generation iPhone. Quanta is already the primary supplier of MacBook and MacBook Pro notebooks. Apple, now the world's third-largest PC maker, switched MacBook orders from another Taiwanese rival, Asustek Computer. Meanwhile, Acer, another major PC maker, has increased orders.

Investors may also want to review Quanta's valuation in a market that's lagged behind other Asian bourses. Quanta shares, which now fetch 11 times earnings, trade at a discount to the Taiwan exchange's 12.3 multiple. The stock could climb as high as 68 New Taiwanese dollars (U.S. $2.10) from its recent price of NT$46.05, according to Citi Investment Research. Others are even more bullish. Credit Suisse sees upside to NT$70.

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