As the digital economy rapidly develops, the demand for high-capacity, high-speed, and high-quality storage devices continues to rise. Therefore, the Hard Disk Drive (HDD) industry remains an important component of the digital storage sector.

For the information, the HDD is a data storage device consisting of magnetic disks, read/write heads, and other components. HDDs are mainly used in personal computers, servers, digital video recorders, game consoles, and mobile devices. In addition, HDDs also have broad application prospects in big data storage, cloud computing, and other fields. Currently, the major participants in the HDD market include Seagate, Western Digital, Toshiba, and Hitachi Global Storage Technologies.

However, due to sluggish demand, inventory reduction, and the popularity and technological advances of Solid-State Drives (SSDs), the HDD industry is facing a downward trend. Just a few days ago, Dufu Technology Corp. Berhad (DUFU, 7233), which engages in the manufacturing and trading of HDD and other related components, reported weaker results.

Let's take a look at DUFU's latest quarterly performance (Q1FY2023).

Revenue Comparison (YoY -14.07%, QoQ +44.88%)

As of March 31, 2023, DUFU's revenue decreased by approximately RM12.15 million or 14.07% YoY to around RM74.18 million. This is mainly due to the decline in HDD business revenue. In fact, since the third quarter of the 2022 fiscal year, the company's revenue has been declining, as HDD demand has significantly decreased after the pandemic, and major enterprises have also adjusted their inventory and reduced orders.

The quarterly report shows that the company's business revenue in Malaysia, Singapore, and China all decreased year-on-year. Among them, Malaysia's business revenue decreased by 9.31% YoY to around RM69.29 million. Singapore and China's business revenue decreased by about 17.53% and 30.08% YoY, respectively, with revenue of approximately RM58.12 million and RM11.44 million recorded in this quarter.

However, compared to the previous quarter, the company's revenue increased by approximately RM22.98 million or 44.88%. This is due to the company's increased production volume in this quarter, which has led to an increase in revenue.

Net Profit Comparison (YoY -40.61%, QoQ +260.26%)

Due to the decrease in sales of HDD-related products and the rise in raw material costs, DUFU's net profit decreased by approximately RM7.44 million or 40.61% YoY to around RM10.88 million.

The company's pre-tax profit also fell from around RM23.74 million in the same period last year to around RM14.39 million. Among them, the business in China went from profit to loss, suffering a pre-tax loss of approximately RM0.34 million, reversing the profit performance of approximately RM0.92 million in the previous period.

Along with DUFU's high production volume in the first quarter, the company's fixed management expenses also decreased. Therefore, the company's pre-tax profit increased by approximately RM12.37 million or 611.97% QoQ.

It is worth mentioning that the company announced a final dividend of RM0.040 per share in this quarter, with an ex-date of May 29 and a payment date of June 16, 2023.

Outlook

Due to numerous uncertain factors in the first half of this year, the high inflation rates in the United States and European countries have led to a slowdown in consumer spending and a reduction in capital expenditures for businesses and cloud industries, which in turn has affected the demand for HDD. Therefore, due to the decrease in customer demand and the challenging operating environment, coupled with the unclear market conditions, the management expects a decline in performance for the next quarter.

In addition, large companies in the technology sector are undergoing a second round of layoffs, which means that the entire industry will face severe challenges in the coming quarters, especially in the data center and industrial terminal markets, highlighting weak demand.

On the cost side, although raw material costs have fallen from their peak, prices are still high. The increase in energy costs in Malaysia will also further impact the company's profitability.

Looking to the long-term, the demand for cloud data centers will continue to increase with the growth of digital storage devices, and HDD storage devices remain the most economical way to store large amounts of data. According to Storagenewsletter, the HDD market is expected to grow at a compound annual growth rate of 11.20% from 2022 to 2029.

So, what do readers think about DUFU, which is currently in a net cash position with a PE ratio of approximately 18.40x?