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Asia300

Foxconn unit sets sight on North America after Hong Kong IPO

Connector maker targets growth in automotive, industrial and medical sectors

FIT Hon Teng CEO Lu Sung-Ching, left, and executive director Lu Pochin at a press briefing on June 28. (Photo by Joyce Ho)

HONG KONG -- FIT Hon Teng, an electronic connector and cable maker controlled by Taiwan-based Hon Hai Precision Industry, said on Wednesday that it hoped to raise $2.7 billion Hong Kong dollars ($350 million) from an initial public offering in Hong Kong.

The company is selling 990.06 million new shares, which represents 15% of the enlarged total issued share capital after the float. They are being marketed at between HK$2.38 and HK$3.08 apiece. The deal will price on July 6 and the stock will begin trading July 13.

A quarter of the IPO proceeds will be used for mergers and acquisitions, another 25% for investment in optical transmission solutions and other interconnection technology applicable in advanced data centers.

"In terms of M&A opportunities, it's really into what we call the future-growth areas, the areas that we have significant ambitions, the A.I.M.," said Lu Pochin, FIT Hon Teng executive director, referring to the automotive, industrial, and medical sectors. He said the company would tap "some unique opportunities that existed in the mobile devices market" and make a drive into "communication infrastructure."

In May, the company completed its $2.5 million takeover of XingFox Group, with which FIT has been collaborating since mid-2016 to conduct research and development in batteries, especially pouch cell batteries that can be used in mobile and wireless devices.

In December 2015, FIT also bought the optical module unit of supplier Avago Technologies Wireless Manufacturing ahead of its merger with Broadcom, a fabless semiconductor company headquartered in both Singapore and California.

According to the IPO prospectus, 3% of the funds raised will be devoted to the enhancement and addition of production facilities relate to optical modules. North America would be a likely destination, the company's CEO Lu Sung-Ching told reporters on Wednesday.

"Besides in Asia, particularly in China, we also have expanded into Southeast Asia and also South America. So the next phase, logically, we'll look at the global market as a whole. And as a supply base of course we're going to expand further into where the market is. So yes, the expansion [including] North America is our plan," said the CEO.

Pulled in by Apple

The move was in line with a plan by Hon Hai, better known as Foxconn Technology, to establish a manufacturing base in the U.S. at Apple's suggestion. Foxconn Chairman Terry Gou said in January that the group was considering building a highly automated display panel production facility and a molding facility in the U.S. Foxconn is a key iPhone assembler.

FIT was spun off from the contract electronics giant in April 2013 as part of its streamlining process. Foxconn still holds 92.57% of FIT, which later created other subsidiaries in Singapore, Vietnam, Japan, and the U.S in addition to the mainland entities acquired from Foxconn.

However, FIT's orders from Foxconn has been declining steadily over the past few years, from $1.09 billion in 2014 to $661.1 million last year, representing 44% and 23% of the company's total revenue respectively.

FIT CEO declined to comment on whether the company would receive more orders from Apple, but was "extremely confident" about the company's "solid performance this year."

FIT's revenue surged 37% to $718 million in the first quarter compared with a year ago. Last year its revenue rose 23.73% to $2.88 billion following a decline of 6.22% the previous year. But its gross profit margin fell from 19.2% in 2014 to 17.7% at end-March.

Return on equity also fell from 24.8% to 13.6% between 2014 and 2016, as net profit skidded from $187.03 million to $168.56 million.

The company attributed the decrease in profitability to rising raw material and component costs as a result of greater competition.

Partly due to the less-than-ideal financial results, the company decided to shelve its IPO plan last year. "Unfortunately, the time that we launched is a time that coincided with the U.S. election. There is just way too much volatility in the market for anybody looking at the capital market. That's the reason why we decided to wait and see," said Lu Pochin.

Other Apple-related stocks listed in Hong Kong include acoustic parts maker AAC Technologies, camera modules maker Cowell E Holdings, lenses manufacturer Sunny Optical Technology and handset assembler FIH Mobile, which is also a subsidiary of Foxconn.

Nikkei staff writer Debby Wu in Taipei contributed to this story.

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