EUR 850.00 For Business Accounts Only

Morningstar | Asustek’s 4Q Results Miss Due to Costs for Mobile Business Restructuring; Slashing FVE to TWD 222. See Updated Analyst Note from 22 Mar 2019

No-moat Asustek Computer’s fourth-quarter 2018 results came in worse than we expected. Due to a one-time impairment cost of TWD 6.05 billion stemming from its smartphone business restructuring, the company reported a net loss TWD 2.82 billion for the fourth quarter. Net profit for 2018 declined 73% year on year to TWD 4.24 billion, with EPS reaching TWD 5.70. Brand revenue was down 15% year on year to TWD 88.1 billion in the fourth quarter. Mobile sales dropped significantly, around 45% year on year, while PC and component revenue shrank 10% and 16% year on year, respectively. Gross margin also went down 9.5 percentage points year on year to 4.1% and operating margin was down 11 percentage points to negative 7.2%.

We slashed our fair value estimate for Asustek by 10.5% to TWD 222 per share from TWD 248, as we revised down profit growth forecasts in the next five years and took into account the worse-than-expected 2018 earnings. We anticipate the firm’s revenue and operating profit to decline 10% and 28.5% year on year, respectively, in 2019, as we forecast its PC, component, and mobile revenue to decrease 8%, 10%, and 30%, respectively. In the medium term, we expect the company’s revenue and operating profit to decline 1.5% and 5% per year in the next five years, while gross margin and operating margin are expected to average at 14% and 3.9%. We retain our no-moat and stable trend ratings and think the shares are fairly valued at current levels.

Asustek’s smartphone business has struggled to grow in three consecutive years and revenue continued to worsen in 2018, contracting 30% from 2017, amid in a very competitive smartphone market. The company decided to restructure the mobile business and the transformation is expected to be completed in the first half of 2019. We think the reform is a good move for the company. Its new strategy will shift its focus toward power users, particularly in the gaming sector. Management plans to launch a new model of its gaming (Republic of Gamers, or ROG) phone and expects the mobile business to recover in the second half of 2019. Although the company aims to turn profitable in three years, we think this will be challenging for it to achieve, as we don’t see Asustek having any competitive advantage in this red sea market. We forecast the revenue for the mobile business to decrease at CAGR of 7.4% over the next five years.

Asustek also expects to see some weaknesses in the PC and component (motherboard and graphics card) businesses in the first half of 2019. In the short term, the shortage of Intel CPUs will continue to pressure the PC business, although the company has increased its CPU supplies from AMD. Management believes the issue will be eased in the second half of 2019. In the longer term, the company worries about the demand weakening and operating costs increasing due mainly to the U.S.-China trade tensions. As for the component segment, we expect to see some inventory adjustments, as the strong demand for blockchain mining has faded away since in second half of 2018. Given the industry headwinds ahead, we now project the revenue for the PC and component segments to drop at CAGRs of 1.7% and 0.5%, respectively, over 2019-23.