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August 6, 2012 4:12 pm
It seems odd that Hon Hai’s share price should jump the most in four years just because its partnership with a company in a lot of trouble will still go ahead. But Monday’s 7 per cent rise was probably a good reflection of the relief its investors feel at the fact that if Hon Hai can renegotiate the price it will pay for its stake in Sharp, it might start to look like a better deal.
Hon Hai group thought it was getting a good deal in March when it agreed to pay Y550 per share for a 6.6 per cent stake in Sharp. Yet the maker of Apple products underestimated how bad things could get at the lossmaking Japanese TV maker. Sharp’s share price has fallen by two-thirds since the transaction was announced. If it was unable to renegotiate the deal, which is expected to go through by March next year, Hon Hai was set to lose about T$6bn over its second quarter in non-operating income as it booked investment losses, Bernstein estimates. A newly negotiated price that better reflects Sharp’s current share price of Y181 could improve Hon Hai’s net income by a third over the period.
There is no guarantee that Sharp has hit the bottom yet, however. Its first-quarter losses of Y138bn were worse than expected as performance at its flat screen TV segment keeps deteriorating. Inventory days for these products have gone up by 4 days over the past three months to 104 days. And Sharp’s new guidance for full-year losses of Y250bn already assumes a better second half of the year. That suggests that forecasts could get cut again.
Hon Hai hopes to draw on Sharp’s panel display technology to compete better with the likes of Samsung. But if Sharp remains loss making, Hon Hai will struggle to recoup its investment. A lot of moving parts still have to fall into place – including Apple’s much touted TV – before Hon Hai shareholders should be happy with its punt on Sharp.
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