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Asia300

Foxconn limits earnings blow from Sharp

TAIPEI -- Hon Hai Precision Industry's ability to cushion the earnings fallout from its acquisition of struggling Japanese electronics maker Sharp has relieved many observers.

The Taiwanese contract manufacturing giant also known as Foxconn spread out the impact by splitting up ownership among four group units.

The negative impact of Sharp was small, said Vincent Chen of Yuanta Securities in view of Hon Hai's better-than-expected July-September results, released Friday. All eyes were on how the company's acquisition of the Japanese manufacturer would affect its earnings. Based on financial reports disclosed Monday, the impact on non-operating earnings appears be less than 1 billion New Taiwanese dollars ($31.2 million).

Hon Hai as a group owns 66% of Sharp, but this interest is split among four group companies, including Chairman Terry Gou's investment company. The listed core entity, Hon Hai, holds about 45%. So only the commensurate portion is reflected in non-operating earnings. This maneuver shows how Hon Hai, whose growth has plateaued, took care to shield its earnings as much as possible.

Operating profit at Hon Hai grew 10% on the year to NT$42.1 billion, rising for the first time in four quarters, with help from demand from Apple. Net profit shrank 9%, but this was mainly due to one-time factors such as financing costs.

Sharp sustained net losses of 255.9 billion yen ($2.36 billion) in the year ended in March, and 45.4 billion yen in the April-September half. Even for Foxconn, which earned a net profit equivalent to around 500 billion yen in 2015, Sharp's hemorrhaging is not negligible.

The dividing of Sharp shares also helps Hon Hai avoid a worsening of profit margins due to larger sales. In the intensely competitive manufacturing service and electronics parts businesses, gross profit margin and operating margin are considered key gauges of growth potential. With Sharp's earnings improving, too, concerns have subsided following the Friday earnings report.

No stock price boost

Yet on Monday, Hon Hai shares remained flat. A slowdown in iPhone sales since the second half of last year led to four straight quarterly net profit declines through the July-September period. The company had aimed to log record profit this fiscal year for the sixth straight year, but this is less certain now.

This highlights the group's fundamental challenge of easing its reliance on electronics manufacturing services. Hon Hai has taken a series of steps this year to explore a new growth model -- including the purchase of Nokia's conventional phone business and partnering with U.K. chip designer Arm Holdings.

Success with the Sharp acquisition will go a long way toward boosting investors' confidence in Hon Hai's strategy.

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