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Morningstar | Asustek’s 2Q Profit Was Hit by Foreign Exchange Loss; Trimming FVE to TWD 263 per Share. See Updated Analyst Note from 13 Aug 2018

No-moat Asustek’s TWD 1.33 billion second-quarter net profit, down 34% year on year, was lower than we expected, mainly owing to a TWD 1.41 billion foreign exchange loss and a TWD 612 million investment loss from Askey. Excluding the nonoperating items, operating profit saw a strong improvement, up 62% year on year to TWD 2.82 billion, helped by 1.2 percentage points of gross margin expansion on the back of higher average selling prices. Although the company expected 20% sales rebound sequentially (or down 4% year on year) in the third quarter, management had a conservative prospect on the margins, due to ongoing component shortages and delays of new products rollouts, as well as additional foreign exchange losses from the U.S.-China trade war.

While we maintain our no-moat and stable moat trend ratings, we are trimming our fair value estimate for Asustek by 7% to TWD 263 per share from TWD 282, as we lower our revenue and profit growth forecasts, given the weak performance in its PC and mobile segments and higher nonoperating losses. We revise our medium-term revenue and net income growth downward to negative 1% and 1%, respectively, from 0.5% and 3.7% previously. On the product mix front, we project the PC segment to decline 2.5% annually (from 0.5% previously), the mobile phone business to drop 6.7% annually (from 0.5% previously), and the component division to grow 6.4% per year (from 4.6% previously). We think the shares are fairly valued at current levels.

Brand revenue came in at TWD 80.5 billion, down 7% year on year, slightly lower than the company’s and our expectations, owing to the component shortages and weakening demand in the blockchain mining. The PC, mobile, and component segments accounted for 60%, 15%, and 21% of sales, respectively. This implied year-on-year decreases of 11% and 18% in the PC and mobile businesses, respectively, while the component business grew 15% year on year.

Global PC shipments of 62.3 million in the second quarter, up 2.7% year on year, marked the strongest year-on-year growth rate in more than six years, according to IDC, driven by commercial-use and gaming PCs. However, Asustek’s PC business seemed to be much weaker than its major competitors, given that competition in the European market was escalating. We think the PC business will see further headwinds, given the continued issue of component shortage (such as Nvidia’s GPU) and the impact on postponing its new products (shortage of Intel’s new CPU), and we project market share to further decline.

The firm guided to strong quarter-on-quarter growth in the third quarter, with the PC, mobile, and component segments guided to grow 15%-25%, 45%-55%, and 10%-15%, respectively. Management also expects to suffer more foreign exchange losses in the third quarter--given that the U.S.-China trade war has increased the volatility of foreign exchange rates--but expects these to stabilize in the fourth quarter.