Trading Buy with 100% upside. Our fair value of RM1.35 is based on FY21E PER of 18.7x, in line with its 3-year mean. We like JCY for being: (i) a close proxy to the massive upcycle in the HDD market due to data centre expansion, (ii) able to enjoy higher order volume and ASP owing to supply chain consolidation, and (iii) proactive in diversifying revenue stream by venturing into the automotive market.

Surge in data centre expansion. Being well positioned in the HDD supply chain, JCY is poised for a huge upcycle on rising demand for HDD. With the emphasis of social distancing still in place, the practice of home-based working is expected to continue for the foreseeable future. As such, web-based interactions (e.g. e-learning, video conferencing and remote access file sharing) have surged tremendously since the Covid-19 lockdown. Due to the sudden rise in traffic and bandwidth demand, cloud giants are experiencing a huge burst in data centre development. Amazon Web Services have indicated massive expansion in Northern Virginia to build a 2.5 million sq. ft. of cloud capacity in addition to its existing 50 data centres in the area. Google and Microsoft have also voiced the need for expansions.

HDD shipment volume on the rise. Tracking JCY’s two major customers (contributing more than 80% of group sales), we noticed that the volume of HDD shipment in the last six months (in terms of Exabyte) have jumped 47% YoY and 21% YoY, respectively. Both customers are guiding a strong ramp-up in 2H 2020 owing to robust demand for 14TB drives as well as the upcoming 16TB and 18TB drives. To cope with the orders, JCY is realigning its production plant and bringing in new equipment to cater for the increase in components (actuator arm and disc separation plate) per drive which rises in tandem with the growth in storage capacity.

ASP spiralling upwards. Although current HDD prices have risen 16% compared to the same period last year, it still remains the preferred storage medium due to cost factor. In comparison, SSD of the same volume cost 9x-10x more than that of HDD. From an economical standpoint, we believe that HDD will continue to dominate the data centre space for the next decade.

Supply chain consolidation since the 2011 Thailand flood has been playing into the group’s favour as it is one of the very few vendors left in the industry. Back then, there were at least 10-12 players in the supply chain. Currently, there are only 2-3 players left and 1 of them is struggling to cope with production. As a result, key customers are loading more volume to the group, making JCY the main supplier for base plate, actuator and disc separation plates. In turn, JCY is able to enjoy both higher volume and ASP. Furthermore, JCY is expanding into the automotive business. While contribution is still small at c.2% of group sales, it could potentially morph into a new earnings driver in 2-3 years given the group’s speciality in casting and fabrication.

Net profit in FY21E is expected to grow 3x to RM150.8m as the group takes on higher loading volume in 2H 2020 and into 2021.

Trading Buy with a FV of RM1.35 based on 18.7x FY21E PER, in line with its 3-year mean. The recent surge in web computing is just the beginning of a long-term secular demand for mass capacity storage with TAM estimated to rise from the current market size of US$12.5bil to US$24bil in 2025. We like JCY for being: (i) a close proxy to the massive upcycle in the HDD market due to data centre expansion (ii) able to enjoy higher order volume and ASP owing to supply chain consolidation and (iii) proactive in diversifying revenue stream by venturing into the automotive market.

Source: Kenanga Research - 2 Sept 2020