More pain ahead for netbook makers?

Reuters) - Taiwanese netbook makers, the low-priced darlings of the personal computing industry just a few years ago, are jumping into the high-margin tablet space after seeing their market eroded by the stylish gadgets.

Though Apple Inc’s iPad has become a roaring success, Asustek and Acer, who together control more than half of the global market in netbooks, are still banking on sales growth in emerging markets such as China.

Some analysts still expect strong demand in emerging markets for the affordable netbooks, which took off in 2008, and captured a big slice of the overall laptop market.

Acer shares have fallen about 20 percent over the past 3 months while Asustek shares have been steady in a flat broader market.

Analysts expect 2011 netbook shipments to be flat to 15 percent lower from the previous year, while tablet shipments may triple to quadruple this year and account for around 30 percent of the total notebook PC market.

“The aggressive netbook shipments target will likely be achieved through increased market share in emerging markets like Brazil after the company’s success in Russia, China and India,” said KGI analyst Angela Hsiang, who has an outperform rating on Asustek.

HBC analyst Jenny Lai said if netbook PC makers are successful in selling more tablets, this will give a big boost to their profit margins and valuations. “We are seeing many new tablets are being introduced to the market after March, this is a transition the netbook makers have to make,” said Lai who has an overweight rating on Acer.

Asustek is trading at a forward price to earnings multiple of 11, compared with a 10-year median of 8.6. Acer trades at a multiple of 11, lower than its 10-year median of 13.

Asustek reported a 29 percent fall in fourth quarter net profit but expects sales to bottom out in the second quarter. It aims to sell 2 million tablets this year and keep the revenue contribution from tablets at 10-20 percent from next year.

The company is targeting a 28 percent rise in total netbook shipments to 14 million units this year. While emerging markets will be the growth driver for Asustek, Acer is betting on the growth in China after an alliance with Founder Technology Group Corp formed last year. Acer aims to sell a total of 6 million tablets in 2011.

“Asustek has the most aggressive shipment targets and I don’t think it will meet them,” said Mirae Asset Management analyst Lim Dean-daeyun, who advises investors to cut their holdings in the company.

“Asustek face more challenges from the consumer side, while Acer has a cushion from the corporate side.”

He said netbook makers could sharpen focus on growth in emerging markets where the penetration of netbooks is less than 50 percent, or cut prices to compete with tablets.

Average prices of netbooks sold by Asustek and Acer are about $300, with Asustek also selling premium models.

Asustek, the netbook pioneer, plans to sell its first tablets in the second quarter for $399-$799, while Acer has said it would price its new tablets between $299-$699, depending on the display size and applications. Their prices are cheaper than Apple’s newly launched iPad 2 which has a price range of $499-$829. Daiwa analyst Calvin Huang is wary about Asustek’s reliance on emerging markets.