Subpar  earnings  visibility  and  poor  stock  liquidity  on  Notion  haveprompted  us  to  cease  coverage  on  the  counter  for  now.  We  foresee further  weakness  in  its  camera  segment  on  the  proliferation  of smartphones  with  improved  cameras,  and  believe  earnings  accretion from its smartphone venture is unlikely to be significant for now.  Our previous call was NEUTRAL, with a TP of MYR0.45.

Camera  division  to  remain  weak.  Although  we  expect  Notion’s  hard disk drive and auto segments to grow at 5-10% and 10-15% respectivelyper  annum,  driven  by  demand  for  enterprise  storage  and  via  the expansion  of  offerings  for its  automotive  parts,  we  do  not discount  the possibility  of  further  earnings  disappointments  given  the  currently lacklustre  global  camera  sales.  Based  on  the  Camera  &  Imaging Products Association’s statistics, global shipments of digital cameras and interchangeable  lens  dropped  26.5%  YoY  for  YTD  Nov  2014.   This reaffirms  our bearish stance on its camera component segment, which registered  revenue  of  MYR56.3m  (-45.2%  YoY)  in  FY14.  We  expect further weakness as the latest smartphones in the market are equipped with increasingly sophisticated camera modules.

Smartphone segment unlikely to be exciting.  We gather from industry sources that Notion could be looking to carry its own smartphone brandsto penetrate into the mobile industry.  To minimise its capital outlay,  we believe  the  group  would  likely  procure  its  products  from  original equipment manufacturer (OEM) smartphone manufacturers in China visà-vis  setting  up  its  own  production  plant.  While  we  acknowledge  that there could potentially be a niche market for this,   earnings accretion is unlikely  to  be  significant,  taking  into  account  that:  i)  the  mass  market smartphone  segment  is gradually  commoditising,  as evident in Xiaomi’s and  Lenovo’s  (992  HK,  NR)  recent  success  in  expanding  their  market shares  with  their  affordably  priced  offerings,  and  ii)  premium  brand owners such as Apple (AAPL US, NR) and Samsung (005930 KS, NR)invest  heavily  on  their  in-house  developed  technology  as  well  as marketing activities.

Ceasing coverage.  The relatively unexciting near-term outlook, coupledwith the poor trading liquidity of its shares leads us to cease coverage on the stock for now. Therefore,  we do not ascribe any recommendation for the company. Our previous call was NEUTRAL, with a TP of MYR0.45.

Source: RHB