Taiwanese smartphone maker HTC Corp (TPE:2498) may find it difficult to generate sales growth in the second half of 2013 despite the success of the new HTC One flagship device, Bank of America Merrill Lynch said Tuesday.

htc logo

Missed Opportunity Window

BAML believes that HTC Corp (TPE:2498) has a good window in 1H13 in the high-end smartphone market given the customer push back on iPhone 5 and S4. However, the issue of execution and operation has led HTC to miss the best opportunity to rebuild its volume and brand premium. HTC’s business model works well in smartphones’ early product cycle but there is a lack of execution during smartphone commoditization.

Flagship HTC One May Contribute Little to Growth

The Street is positive on New One shipment momentum, but BAML checks show a declining shipment momentum after June. The model has been in the market for around 5-6 months and they believe is close to the end of its product life.

Moreover, they have concerns about HTC Corp (TPE:2498)’s operating margin because of high BOM (bill of material) cost structure and poor execution. BAML further cut 2013-14E EPS by 17%/3% respectively as they expect the margin recovery will be softer than expectation.

HTC’s Second Half Models Will Be Refreshed Versions

Analysts believe that the models in 2H13 are most likely the refreshed version of 1H, like Butterfly S and smaller-size HTC New One. BAML thinks HTC Corp (TPE:2498) is likely to launch a 4.3” HTC One Mini in 3Q13 to hit the mid-end smartphone market.

However, competition of mid-price segment is much higher than the high-end in terms of price and performance, which is not in favor on HTC’s business model and higher BOM cost design. Further, high-price buyers might just go for a high-end model, while price-sensitive buyers have a wider choice on low-priced models.

BAML gave the stock an Underperform rating and a target price of NT$153 (US$5.09) while lowering  estimates for HTC’s earnings per share by 17 percent for 2013 and by 3 percent for 2014 to reflect a softer-than-expected margin recovery.