Morningstar | Mobile Business Continued to Weigh on Asustek’s 1Q Result; TWD 222 FVE Unchanged
No-moat Asustek’s first-quarter results were broadly in line with our expectations, with revenue and net profit down 7.3% and 8.1% year on year, respectively. The transformation of the smartphone business continued to weigh on its profitability, with gross margin down 2.5 percentage points from the year-ago quarter. However, the 11.5% gross margin improved significantly compared with 4% gross margin in the last quarter. Management seemed to be more optimistic with a mild growth outlook for the year as the transformation process will be completed in the first half. It expects the PC and component revenue to decline 0 to 5% sequentially in the second quarter, which implies a low- to mid-single digit year-on-year growth. We expect revenue to accelerate in the second half of the year from the growth of its new higher-end product launches. Our fair value estimate for Asustek remains at TWD 222 per share and we think the shares are fairly valued at current levels.The mobile business saw 21% revenue declines in the first quarter and incurred net losses of TWD 554 million. We think the smartphone business will gradually improve, as the company will increase its Republic of Gamers, or ROG, line of products and plans to launch its second-generation ROG smartphone in the second half. That said, given the minimal shipments, we don’t expect it to reach breakeven point in the short term.
Excluding the mobile business, revenue was down 5.6% year on year, slightly better than we expected. Asustek ranked as the fifth largest PC maker worldwide (6.3% market share) in the first quarter, according to Gartner. The company’s 3.6 million PCs shipments, down 7% year on year, in the first quarter, was due to a shortage of CUPs. The company expects the Intel’s CPU shortage will be resolved by the third quarter and it would continue using AMD’s solutions to fill the gap in the meantime. Premium products continued to outperform, with thin and light notebook increasing to 40%-50% of its total notebook shipments. The gaming notebook shipments also grew 20% year on year in the first quarter.
Asustek Computer is engaged in the production, design and sale of notebook PCs, main boards, CD-ROMs and add-on cards. Co.'s product lines include desktop and server, 3D AutoCAD, advanced sound blaster, NB, EeePC computer and Eee series Eee Pc, intelligent navigation phone, LED display, broadband and communication products, and advanced server.
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