In the Right Space

Dufu Technology is a global market leader in the supply of disk spacers, a critical component for Hard Disk Drives (HDD). Its customers are comprised of mainly leading brands like Seagate and Western Digital. Unlike other HDD components, demand for disk spacers increases in tandem with storage capacity. This is Dufu’s niche, and the company has managed to grow at a 3-year revenue CAGR of 10%, leveraging on the increasing demand arising from enterprise and cloud storage.

Global Leader in HDD Disk Spacers

Dufu Technology designs, develops, and manufactures precision machining components for the HDD industry. Approximately 70% of revenue is derived from the HDD segment. In the HDD segment where Dufu manufactures disk spacers, disk clamps and VCM pins, its key customers include Seagate, Toshiba and Western Digital. Dufu also boasts of being the global leader in the manufacture of disk spacers.

Cloud Storage a Boon to Hard Drive Demand

Although PC sales have continued to decline and solid state drives (SSD) are increasingly replacing HDDs, especially for the smaller storage capacity, Dufu has continued to see rapid expansion in recent years (3-year revenue CAGR of 10%). This has primarily been on the back of increased enterprise and cloud storage, which have driven the demand for Dufu’s disk spacers, in particular. Unlike conventional HDDs which comprise one disk and one spacer, larger drives comprise multiple disks (for larger storage) which require an equal number of disk spacers to ensure proper functionality. Near-term catalysts include Helium drives and Heat-Assisted Magnetic Recording, which in short increases the capacity of the amount of data to be stored on an HDD.

Growing Its Non-HDD for Expansion

In 2015, Dufu also expanded its non-HDD segment, which builds precision metal components for sensors and control devices. Dufu is now looking into venturing into the automobile sector, leveraging on its precision machining to provide sensitive sensors and other electronic parts. Carrying better margins than the HDD segment, this division has also aided overall group profitability. In 2017, the non-HDD segment grew >30% yoy.

Valuation Below Local Peers, in Line With Global Market Leaders

Dufu’s local peers include Notion VTEC (NOTION MK, not rated) and JCY International (JCY MK, not rated), which trade at 2017 PERs of 15.7x and 12.6x compared to Dufu’s 9.6x. Dufu’s end customers (Seagate and WD) trade at a PE multiples of between 6-10x.

Source: Affin Hwang Research - 6 Aug 2018