Results

JCY’s 1HFY13 core net loss of RM66.3m came in below expectations, not comparable with HLIB and consensus full year core net profit estimates of RM194.1m and RM61.5m respectively.

In 2QFY13, JCY registered revenue of RM401.4m (-30.4% yoy, +6.5% qoq), EBITDA of –RM5.0m (>-100% yoy, +35.3% qoq), and normalized PATAMI of –RM33.3m (>- 100% yoy, >-1.2% qoq).

Deviations

Lower-than-expected sales coupled with higher labor cost resulted in deteriorating EBITDA margin.

Dividend

None. YTD dividend is 1 sen per share declared on 26 Nov 2012 and paid on 10 Jan 2013.

Highlights

YoY: Top line was the main culprit of the disappointing results as JCY blamed it on the compounded consequences of reduction in volume shipped and reduction of ASP.

Besides the decrease in global demand for HDD, the contraction in sales orders also due to the resumption in operation by its competitors after the disastrous Thai flood.

QoQ: Although revenue grew marginally due to higher shipment and favorable FOREX, the increase in labor cost due to the implementation of minimum wages has nullified the gain and savings from improved operating efficiency.

The negative EBITDA recorded for two consecutive quarters implied that sales were not sufficient to offset fixed costs as access capacity looms.

Customers have also tightened their quality requirement and this has resulted in lower output yields elevating direct operating and material costs.

FOREX gains of RM12.6m in 2QFY13 and RM19.8m for 1HFY13 were mainly due to revaluation of liabilities related to purchase of machineries which are denominated in Japanese Yen.

JCY guided that the uncertainties in the global economy are still affecting demand growth (TAM) of the HDD storage media. Despite the threat of tablet in the consumer market, JCY sees demand stabilizing supported by enterprise market with an expected CAGR of 30% till 2020.

Risks

• Weaker than expected consumer demand for HDDs;
• Higher raw material costs would lead to lower margins; and
• RM appreciation vs. USD.
• Shortage of labor and increasing labor costs.

Forecasts

We have slashed our FY13-15 revenue by 15.3%, 19.1% and 19.1% respectively while imputing higher labor cost. As a result, FY13-15 EPS cut by 107.2%, 71.8% and 66.0% respectively.

Rating

SELL, TP: RM0.37

• Positives - high adoption rate of cloud computing and demand for rich / high density media contents.
• Negatives - Appreciating Ringgit, weak global demand in PC and SDD as substitute.

Valuation

• Maintain our SELL call on the stock despite rolling over TP which was cut by 19.6% from RM0.46 to RM0.37 based on FY14 P/E of 7.6x, the 2-year average P/E of US HDD brand manufacturers

Source: Hong Leong Investment Bank Research - 23 May 2013