• Company profile. JCY is involved in manufacturing, trading and assembling of Hard Disk Drive (HDD) mechanical components such as base plates, actuator pivot flex assembly and antidiscs. The Group’s key customers are Western Digital (market share of >40% of the global HDD market) and Seagate.

• Slowdown in quarterly revenue, but improved profits… JCY released its 2QFY17 results two weeks back recording a revenue of RM406.7m (-11.1% yoy) on the back of lower volumes and ASP, while net profit rose to RM15.4m (vs. RM6.4m) attributed mainly to favourable USD exchange rate against Ringgit.

• …softer short-term outlook, but improving demand from data storage. Despite flattish short-term outlook whereby the HDD demand remains stable at around 100m pieces per quarter, future demand may pick up riding on robust data storage industry. With the increase in digital media catalysed by availability of high-speed broadband, migration to cloud-based computing systems, as well as growth of "Internet of Things" the average HDD capacity delivered by HDD manufacturers continues to rise over the quarters.

• Tighter supply conditions for 10TB drives. According to JCY, demand for 10TB HDDs should grow in 2H2017 as several hyperscale customers (end user of HDD) are looking to shift to 10 TB solutions within this time frame. These transitions may create a tight supply environment for 10TB drives, benefiting hyperscale server component suppliers, eventually.

• Stable dividend payout may cushion the downside. Despite being a loss making company in FY16, JCY continued to reward shareholders with 1.25 sen per quarter over the past two years, translating to an attractive dividend yield of ~8.2% per annum, contributing to a healthy investment case at this current juncture.

• Technical outlook. As the share price retraced near the SMA200, the price rebounded off the RM0.595 level with higher volumes. This may indicate that mild buying support has surfaced with a potential technical rebound towards the target of RM0.635 and RM0.665, with a LT target of RM0.705. Support will be pegged around RM0.58-0.595 and cut loss will be set around RM0.575.

Source: Hong Leong Investment Bank Research - 31 May 2017