Pegatron Finds iPhone Is No Money-Spinner

November 13, 2013 Leave a comment

Nov 11, 2013

Pegatron Finds iPhone Is No Money-Spinner

EVA DOU

Thin is in for smartphones these days, including the newest iPhone. Unfortunately forApple Inc.AAPL -0.29% assembler Pegatron Corp.4938.TW -3.35%, that also describes the state of its margins. Pegatron – named after the flying horse Pegasus – soared out of obscurity as an increasingly important manufacturer of Apple’s mobile products. It’s the main assembler of the iPhone 5C, and it also makes iPad Minis.Apple’s orders helped buoy Pegatron’s revenue to a record in the third quarter. But how profitable it is to work for Apple is still rather hazy.

On Monday, Pegatron’s executives were loathe to answer the foremost question on investors’ minds: Just how profitable is the company’s contract manufacturing business?

Starting this summer, Pegatron stopped breaking out its core contract manufacturing business in its financial reports, which means its earnings from making devices for Apple and other clients are now obscured by its subsidiaries like metal casings maker Casetek Holdings Ltd.5264.TW 0.00% About 30% of its revenue comes from Apple, analysts estimate.

Pegatron’s Chief Financial Officer Charles Lin said the operating margin for the company’s contract manufacturing business remains below 1%, and actually fell in the third quarter as it ramped up its facilities for larger-scale production. That likely refers to production of the iPhone 5C, which began selling in September. Pegatron doesn’t comment on clients, and Apple said Monday it doesn’t comment on suppliers.

The company stopped short of saying when its contract manufacturing operating margin will rise above 1%, a level that most its peers have surpassed. Mr. Lin said the percentage will rise in the fourth quarter, but didn’t give a specific figure.

The prospect that Pegatron may continue squeaking along  –  churning out iPhones and other devices at a profit of less than a penny on the dollar  for an indefinite amount of time – made investors skittish. The company’s stock fell 3.4% to 37.50 New Taiwan dollars (US$1.27) on Tuesday morning.

Despite the challenges, manufacturing for Apple is still seen as good work for those who can get it. Several of Pegatron’s rivals, including Wistron Corp.3231.TW 0.00% andCompal Communications Inc.8078.TW 0.00%, are in talks to join Apple’s supply chain.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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