otion  shares  our  gloomy  outlook  on  both  the  HDD  and  camera  markets.  At  its analyst  briefing  yesterday,  management  revealed  that  the  Oct-Dec  period,  traditionally a vibrant quarter for the company, is now plagued by weaker orders.  Sales  volume  have  already  sunk  by  double  digits  in  October.  With  a  challenging near-term  outlook,  we  are  cutting  our  FY13/FY14  core  earnings  forecasts  by  15%/17% respectively. We also downgrade the stock to NEUTRAL from BUY, with  a FV of RM1.02, based on 6.4x CY13 PER.

Passive year ahead. At its analyst briefing yesterday, Notion detailed a gloomy outlook  for both the HDD and camera markets. The management shared that these two anchor  businesses,  which  together  account  for  ~80%  of  its  top-line,  are  experiencing  a
downturn.  The  traditionally  vibrant  Oct-Dec  period  is  now  plagued  by  weaker  orders,  with sales volume already sinking by double digits in October. Notion expects the trend  to  persist  and  that  a  turnaround  may  only  kick  in  from  April  next  year,  returning  to  normalize, pre-Thai flood levels. Management expects its FY13 revenue to be in range  of RM230m-RM300m, suggesting a possible y-o-y decline of 3%-25%.

Headwinds in the HDD industry... Following the slump in HDD shipments in 3QCY12,  Western  Digital  and  Seagate  have  guided  their  4QCY12  revenues  to  contract  by  7%-13% q-o-q given: i) a flat total addressable market target of 140m units, coupled with ii)
a continuous erosion in average selling prices. Their gross margins are also expected to  compress  by  1%-2%  from  the  preceding  quarter.  We  view  these  indications  as  the  beginnings  of  muted  demand,  mainly  due  to  the  spillover  from  a  limping  global  PC  market.

'and  the  camera  market  following  suit.  Recent  industry  statistics  from  Camera  &  Imaging Products Association (CIPA) also showed  a trend of weakness, indicating that  shipments for cameras with interchangeable lens (CIL) for September had slid 8% m-o-m/y-o-y, making it the third consecutive month of decline. We are indeed perturbed, as  shipments  usually  peak  in  September  and  October.  Moreover,  2H  is  typically  the  strongest shipment period for CIL but this is not the case for this year as 3QCY12 CIL  shipments had already declined by 1% y-o-y.

Downgrade to NEUTRAL, FV revised to RM1.02. With all the headwinds in mind, we  are cutting our FY13/FY14 core earnings forecasts by 15%/17% respectively. Ascribing  the same CY13 PER multiple of 6.4x (a 20% discount to its 7-year average forward PER  of  8x),  we  derive  a  FV  of  RM1.02.  With  little  upside  from  current  prices,  we  are  downgrading the stock to NEUTRAL.

Source: OSK