Compal-Mentary to Mobile Growth
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Compal (TSEC: 2324), Taiwanese original design manufacturer (ODM), is busy these days in strengthening its production capacity. Compal is the second-largest contract laptop manufacturer in the world (behind Quanta Computer) and shipped over 48 million notebooks in 2010. The firm is planning to move most of its manufacturing to China to minimize impact from the gasoline and electricity price hikes in Taiwan and the difficulties that one of its main clients, Nokia (NYSE: NOK) is having as they re-structure their business around Windows Phone and Windows RT.
The current plan is to expand production to a monthly capacity of 800,000-900,000 notebooks at its factory in Chongqing in western China for 2012, as well as another 500,000 units at its factory in Chengdu for Q4 2012. To achieve such high numbers Compal has decided to increase investment by NT$2.89 billion (US$98 million) in LCFC (Hefei) Electronics Technology, a joint venture with Lenovo in northern China, LCFC will start volume production of Lenovo notebooks in Q4 2012. It also plans to increase investment by NT$350 million (US$11.94 million) in its touchscreen subsidiary Henghao Technology in China and is set to adopt the subsidiary's new Touch Sensor technology into its clients' products in the upcoming third quarter.
Its investments are not only limited to China, in Brazil Compal plans to hike its local notebook production capacity with monthly shipments expected to increase 20% to 120,000 units in the first half of 2012 and by 30+% to between 180,000-200,000 units in the second half. Brazil’s demand for notebooks has not been diminished by the rise of the iPad and the tablet. Focusing on its long term strategy to invest in the “4-Screens,” Compal Electronics have acquired Toshiba Corporation’s LCD TV manufacturing facility, Toshiba Electromex, S.A. de C.V. (TMX), located in Ciudad Juarez, Mexico.
Compal recently won the ODM contract for Samsung’s first foray into sub-contracted notebook production. Samsung is the newest addition to its client list, along with Acer, Dell, Toshiba, Hewlett-Packard, and Fujitsu Siemens Computers. They are also working with AMD (NYSE: AMD) as the reference hardware producer for both the Trinity APU-powered notebooks and low-profile Ultrabook competitors as well as Windows 8 tablets; showing off an 11” hybrid design similar to Asustek’s Transformer line that runs Google’s (NASDAQ: GOOG) Android.
Quanta Computer (TWSE: 2382),their biggest rival, is also planning to expand its production capacity in Brazil. In what could be a real threat to Compal, Quanta have been increasing its presence in cloud servers; expanding beyond supplying Google and Facebook by winning the supply contract for Japan’s Nippon Telegraph and Telephone Co. (NTT). Cloud servers are estimated to be another of Quanta’s sales growth driver in the third quarter, in addition to building the new line of MacBooks for Apple (NASDAQ: AAPL), which were released in early June. Quanta has increased its presence in the cloud sever market in the face of margin erosion in the notebook market. It has also partnered with South Korea’s main Internet provider KT Corp to deliver branded cloud servers.
Looking at the financials, for 1st Quarter 2012, Compal reported a 6% year-over-year and 7% quarterly decline in revenues. However, their operating margin was 1.7%, an improvement from the 1.2% over the same period. Even with low profits, the company has maintained its dividend payout ratio. The notebook market was hit hard last year by the iPad and the tablet in general, but the latest reports are of increasing demand through the supply chain especially with the coming of Windows 8 which suggests revenue should stabilize if not increase.
Despite of falling revenues, its investments in revamping its production capacities will help it in the long run. Compal is aggressively investing in the touchscreen market to be ready with the best technology as the next iteration of the personal computing device unfolds. For those interested in investing broadly in this space the SPDR S&P Emerging Asia Pacific ETF (NYSEMKT:GMF) has significant exposure to all of the Taiwanese and Chinese stocks mentioned in this article as well as their customers. If the concerns over Europe ease in the short term, and it looks like they should, the rallies in Asian indices like the Nikkei, the Hang Seng and the Straits Times will continue taking many of these stocks with them.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.