Results

JCY’s 9MFY13 core net loss of RM71.7m came in below expectations when compared to HLIB and consensus’ full year core net loss of RM34.3m and RM46.4m respectively.

In 3QFY13, JCY registered revenue of RM401.7m (-29.9% yoy, +0.1% qoq), EBITDA of RM21.1m (-83.4% yoy, >+100% qoq), and normalized PATAMI of –RM5.4m (>- 100% yoy, +83.8 qoq).

Deviations

Lower-than-expected sales coupled with higher labor cost resulted in deteriorating EBITDA margin.

Dividend

None. YTD dividend is 1 sen per share declared on 26 Nov 2012 and paid on 10 Jan 2013.

Highlights

YoY: Top line was the main culprit of the disappointing results as JCY blamed it on the compounded consequences of reduction in volume shipped and reduction of ASP.

Besides the lower global demand for HDD, the contraction in sales orders was also due to the resumption in operation by its competitors after the disastrous Thai flood.

QoQ: Revenue grew marginally due to higher shipment volume which was sufficient to offset the unfavorable FOREX and lower ASP.

EBITDA was back into the black thanks to improvement in operational efficiency and higher volume shipment resulting in better absorption rate of fixed costs.

Customers continued to tightened their quality requirement and this has resulted in lower output yields elevating direct operating and material costs.

FOREX loss of RM7.4m in 3QFY13 has brought down the 9MFY13’s FOREX gain to RM12.3m which was mainly due to revaluation of liabilities related to purchase of machineries which are denominated in Japanese Yen.

JCY guided that although the declining of PC sales is a concern, HDD market is expected to grow over the next few years driven by cloud computing. Its customers indicated that 3QFY13’s TAM (total addressable market) remains fairly stable at ~133m units.

JCY continues to play down the threat from SSD.

Automation process will be pursued to minimize their reliance on manual labors and continue to emphasis on productivity improvement which will lead to cost reduction.

Risks

• Weaker than expected consumer demand for HDDs;
• Higher raw material costs would lead to lower margins; and
• RM appreciation vs. USD.
• Shortage of labor and increasing labor costs.

Forecasts

Tweaked model according to deviations above which led to FY13-15 EPS revisions by -60.7%, +1.9% and +1.2% respectively.

Rating

SELL, TP: RM0.37

Positives - high adoption rate of cloud computing and demand for rich / high density media contents.

Negatives - Appreciating Ringgit, weak global demand in PC and SDD as substitute.

Valuation

Maintain our SELL call on the stock with unaltered TP of RM0.37 based on FY14 P/E of 7.6x, the 2-year average P/E of US HDD brand manufacturers (see Figure #5).

Source: Hong Leong Investment Bank Research- 20 Aug 2013