EUR 850.00 For Business Accounts Only

Morningstar | Asustek’s 3Q Profits Harmed by CPU Shortage and Foreign Exchange Losses; Cutting FVE to TWD 248

No-moat Taiwanese computer maker Asustek reported weak third-quarter results that fell short of our expectations, with revenue and net profit down 10% and 43% year on year, respectively. The underperformance largely resulted from a shortage of central processing units, or CPUs, provided by Intel, and intensifying pricing competition in the European market coupled with foreign exchange losses due to escalating U.S.-China trade tensions.

Management guided to a conservative business outlook for the fourth quarter, with sales down approximately 10% from last year, given the visibility for the fourth-quarter operation is the lowest in history. Business visibility only reaches 20%, rather than more than 50% as usual, according to management. On the mix front, the supply crunch for Intel microprocessors will continue to weigh on Asustek’s operation and is expected to last until mid-2019. The company expects PC revenue to remain flat sequentially from last quarter (down 11% from last year). Component sales are expected to drop at low-single-digit rate quarter on quarter (down 17% year on year), as demand for cryptocurrency mining tools reduced dramatically, while the mobile business sees a slight sales uptick from last quarter (remaining flattish from prior year), as a result of strategy transformation by exiting the highly competitive Chinese mobile phone market and focusing on niche segments like gaming smartphones.

We are cutting our fair value estimate for Asustek by 6% to TWD 248 per share from TWD 263, as we revise down our forecasts on revenue and profits to account for the disappointing results and more business headwinds ahead from the ongoing U.S.-China trade war amid severe competition. We now predict the company’s revenue to drop 2% annually and expect the operating profit to grow at a CAGR of 1.7% in 2018-22. We think the shares are fairly valued at current levels, although they dropped significantly in the near term.

Brand revenue dropped 10% year on year to TWD 93.8 billion, lower than the company’s guidance and our forecast. PC accounted for 62% of Asustek’s revenue, while component and mobile businesses took 18% and 16% shares, respectively. This implied year-on-year declines of 11%, 15%, and 4% in the PC, component, and mobile segments, respectively. Despite effective reduction on operating expenses, operating profit decreased 25% from the year-ago quarter to TWD 2.2 billion, owing to gross margin deterioration from product mix changes, leading to a 50-basis-point decrease in the operating margin. Given additional investment loss from Askey and foreign exchange losses compared with the prior year, net profit went down 43% year on year to TWD 3.3 billion.