Notion’s  share  price  corrected  by  >25%  since  our  downgrade  in February.  Although we foresee earnings headwinds over the near term due  to  continued  weakness  in  worldwide  PC  and  camera  sales,  the downside  has  largely  been  priced  in  at  current  valuations.  Hence,  we upgrade  our call to NEUTRAL with our TP still at MYR0.49 (based on an average of 8x FY15 P/E and 0.6x FY15 P/NTA), implying a 1% upside.  Subpar  PC  sales.  Gartner’s  3Q14  global  personal  computer  (PC)shipments  registered  79.4m units, marking its  tenth consecutive quarter of negative YoY growth. This reaffirms our bearish view on the  hard disk drive  (HDD)  market  as  we  step  into 2015.  Still,  we  note  that  the  early previews  of  Microsoft’s  latest  operating  system,  Windows  10,  have largely been positive. Should the launch  –  which we expect  in 3Q15  –prove  successful,  this  could  potentially  spark  a  revival  of  PC  sales  as well as entice upgrades among existing Windows users come 4Q15. 

Camera  lens unit faces  headwinds.  We believe  Notion’s camera lens sales,  meanwhile,  could  continue  to  face  headwinds  due  to  the cannibalisation  impact  from  the  introduction  of  smartphones  equipped with  relatively  sophisticated  camera  specifications.  The  Camera  & Imaging  Products  Association  reported  a  14.8%  YoY  decline  in  global shipments of cameras with interchangeable lenses in 8M14.

Potential  diversification.  Notion’s  3QFY14  (Sep)  revenue  comprised PC/camera/auto compoents, at 38/30/32% respectively. To mitigate the weakness  in  the  former  two,  we  believe  management  would  focus  onexpanding its auto division, which recently witnessed higher orders for its electronic braking system parts. We expect its auto division to emerge as the largest revenue contributor come FY15. On a side note, the group is looking  to  penetrate  the  smartphone  component  industry  and  will  be supplying up to 0.5m machined glass parts per month for smartphones come early  FY15. These  could help it  return to the black by 1HFY15,  in our view.

Upgrade to  NEUTRAL.  Following recent retracement in  its  share price,we believe the downside has largely been priced in at current valuations. Hence,  we are upgrading our call to  NEUTRAL  with our TP unchanged at MYR0.49, based on average of 8x FY15 P/E and 0.6x FY15 P/NTA.

Source: RHB