Hon Hai Precision Industry Co. Ltd.

The stable outlook reflects our view that Hon Hai Precision Industry Co. Ltd. can slightly shorten its cash conversion cycle to improve its cash flow over the next two years, thereby enabling the company to keep its ratio of debt to EBITDA comfortably below 1x, despite high capital spending. The stable outlook also factors in our base case that Hon Hai could sustain its profitability and keep its return on capital at 13%-15% over the next two years because of the strong and stable performance of its EMS business, even if the company cannot quickly turn around the Nokia smartphone business. The rating may come under pressure if Hon Hai's profitability, in terms of return on capital, falls below 12%

...Hon Hai's new Integration, Innovation, Design, Manufacture (IIDM) business model for Nokia branded smartphones and Sharp branded TVs could pressure the company's profitability over the next one to two years. Nokia brand remains well known for its feature phones, but the brand has virtually no presence in the smartphone market. Gaining a meaningful market share with sufficient profitability in an already saturated market could therefore prove a daunting task. Hon Hai's engagement in the same business model for Sharp TVs in China could experience the same difficulty. These operational headwinds have weakened Hon Hai's EBITDA margin, which is unlikely to improve quickly due to high initial development costs for new products and business infrastructure. Hon Hai could keep its return on capital at 13%-15% over the next two years. We believe Hon Hai's traditional operations in electronic manufacturing services (EMS) supported by its stable and strong profitability from, even if the company cannot...

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