European brokerage cuts target price on Largan amid Huawei sanctions

A European brokerage has lowered its target price on shares of smartphone camera lens maker Largan Precision Co. amid escalating tension between the United States and China that led to tighter sanctions against Chinese telecom equipment giant Huawei Technologies Inc.

In a research note, the European securities house said the increasing sanctions against Huawei by the administration of U.S. President Donald Trump could lower the Chinese smartphone brand's, shipments, which in turn could affect the bottom line of Largan, one of Huawei's major suppliers.

The impact on Huawei is expected to grow, in particular after the U.S. Department of Commerce announced on Monday that it is tightening sanctions against the Chinese company by adding 38 Huawei affiliates to a U.S. government economic blacklist.

The new measures increased the total to 152 affiliates on the list since Huawei was first added in May 2019.

In addition to being a blow for Taiwanese chip suppliers to Huawei, the tighter sanctions are expected to hurt the Chinese brand's sales, the brokerage said, with Largan facing a net profit erosion of 5 percent-10 percent as a result.

Therefore, the securities house said, it has cut its target price on Largan shares to NT$4,800 (US$163) from NT$5,100, while deciding to leave an "outperform" rating on the stock unchanged, citing the company's continued efforts in high-end lens development.

On Friday, shares of Largan continued to move lower by 0.42 percent to close at NT$3,545.00 after a 4.42-percent plunge a session earlier, although the benchmark weighted index bounced back by 1.98 percent from a 3.26 percent slump on Thursday.

The brokerage said the U.S.-imposed sanctions have curtailed Huawei's smartphone sales since May, which is expected to erode the company's market share at a time when other Chinese rivals such as OPPO, Vivo and Xiaomi have become more aggressive than ever seeking a larger market share.

In China, the brokerage said, Huawei has faced rising competition from its Chinese rivals in the segment of products priced between US$300 and US$600, while in the global market, Huawei has taken on strong competition from Apple and Samsung in the higher-end smartphone segment.

Due to the tighter restrictions imposed by Washington, the brokerage said it has cut its forecast for Largan's earnings per share by 3.8 percent and 7.4 percent, to NT$194.86 and NT$223.93 for 2020 and 2021, respectively, compared with NT$210.70 in 2019.