Ceasing Coverage

We cease coverage on JCY with our SELL call and target price of RM0.26 retained. We expect JCY to continue facing a challenging operating environment due to pricing pressure and the structural shift towards higher adoption of SSD, which has resulted in declining shipment units for the industry. We do not foresee any catalysts ahead, with the exception of a weaker ringgit.

WHAT’S NEW

• Ceasing coverage. We cease coverage on JCY with an unchanged SELL recommendation and target price. We view that JCY is operating in a challenging environment with no catalysts (except for forex benefits from a weaker ringgit) in the foreseeable future, until the company is able to venture into new business opportunities.

STOCK IMPACT

• Challenging times ahead. JCY’s sales in US dollar terms have been declining in the past three years due to lower sales volume and ASP. We estimate that JCY recorded yoy US dollar-denominated sales decline for 13 out of the 14 quarters over 1QFY15-2QFY18. However, JCY’s earnings have been in a volatile trend due to its high sensitivity to the RM/US$ movement. Moving forward, while the weakening ringgit in the near term would be in JCY’s favour, we opine that the fundamentals of the business are vulnerable. Pricing pressure and long-term risk in the HDD industry due to the structural shift towards higher adoption of solid state drive (SSD) remains.
• Key client’s HDD shipment units on a downtrend. Despite 2017 being a good year for SSD players due to the worldwide shortage of SSD, the expected spillover impact on hard disk component player JCY did not materialise. JCY’s key client, Western Digital (WD), saw its HDD shipment units drop 7% yoy in 2017 and 7% in 1Q18.
• JCY does not benefit from WD’s growing high-capacity enterprise HDD business. Although WD is benefitting from the stronger demand for higher value enterprise HDD (less than 20% of industry’s total HDD unit shipment) due to the strong demand from data centre and cloud related storage, JCY does not benefit meaningfully as its sales of HDD component is highly depending on the industry’s unit shipment. The growing enterprise HDD (in terms of units) is not sufficient to offset the declining demand from PCs. To turnaround, we reckon JCY would need to diversify beyond its HDD business. JCY has been looking around for new business opportunities in the past 2-3 years, but thus far nothing has materialised.
• Attractive dividend yield angle disappears. JCY did not declare a quarterly dividend for 2QFY18 (FYE Sept), which was the first time it has not declared quarterly dividend since 2QFY14. Despite still being a cash-rich company (sitting on a net cash pile of RM216m, representing 36% of market cap), the challenging operating enviroment suggests that it could be difficult for JCY to resume and sustain its quarterly 1.00-1.25 DPS in the foreseeable future.

EARNINGS REVISION/RISK

• None.

VALUATION/RECOMMENDATION

• Cease coverage with SELL. We are ceasing coverage on JCY while maintaining our SELL call and target price of RM0.26, pegged to 2019F P/B of 0.5x.

Source: UOB Kay Hian Research - 27 Jun 2018