Seagate benefit for JCY and Dufu

Seagate benefit for JCY and Dufu

Malaysian hard disk drive (HDD) component makers, which supply mainly to Seagate Technology plc, could well take pole position in the HDD industry after rival Western Digital Corp (WD) was beaten out by the flooding in Thailand.

And with a global HDD shortage looming, higher prices are likely to boost margins down the entire value chain, providing some relief for component suppliers hit by low prices and poor margins.

In particular, Malaysia’s JCY International Bhd and Dufu Technology Corp Bhd could well become the prime beneficiaries of having Seagate as a client, said industry observers.
“In fact, orders have been coming in as people are taking advantage of the higher prices they can fetch amid the potential shortage of supply [of HDDs] in the next few months,” said the industry observer.

He said prices of HDDs and components are expected to increase in view of the disrupted HDD supply chain that will in turn hit original equipment manufacturers (OEMs) such as IBM, Dell and EMC in the coming months.

Press reports from Thailand suggest that prices of HDDs have increased by 20% to 25% in the past two weeks.

For an industry where margins are thin, this could provide a big boost to earnings, even if overall volume declines.

An analyst noted that it is not easy for HDD producers to switch component suppliers quickly, due to product qualification issues. As a comparison, Seagate’s net profit margin was 5% in the latest quarter. In the June 2011 quarter, Dufu was just marginally profitable while JCY posted losses.

In contrast, Notion VTec Bhd will likely be most affected by the floods, with a double whammy for both its HDD and camera divisions, as its HDD sales are mostly to WD and its

Thai factory has stopped production. Its sole camera client, Nikon Corp Ltd, has also shut its operations in Thailand due to the floods.

To recap, the global HDD sector has been hard hit by the flooding in Thailand because a huge portion of the supply chain is situated in the country’s worst hit areas.

WD recently announced a halt to its production in Thailand. Malaysian HDD component makers that had operations in that country, such as Eng Teknologi Holdings Bhd and Notion VTec, followed suit.

WD CEO John Coyne the company’s December quarter revenue will fall 60% from a year ago since the company has a high concentration of factories in the flooded areas in

Thailand. Some 60% of its HDDs are produced in Thailand, and reports estimate it will take four to six months to resume normal production.

Seagate, on the other hand, issued a press release recently announcing that its manufacturing facilities in Thailand are fully operational.
Analysts expect WD’s market share to fall while Seagate gains, as the latter’s production facilities remain largely unscathed.

“Seagate expects its December quarter units to be 45 million, implying a 12% quarter-on-quarter (q-o-q) decline. In contrast, WD guided to a 58% q-o-q decline in units. We believe the stark contrast in relative deterioration in units [or production volume] could prop up shares of Seagate,” JP Morgan said in a research note on Oct 21.

With JCY’s operations largely unscathed by the flooding in Thailand, the company could well stand to benefit from more orders coming from Seagate, said industry observers.

But JCY could still face some cost pressure going forward, said an analyst.
“The tighter supply could perhaps help to push up [JCY’s] average selling price [ASP], but still they have input and labour costs to address,” said the analyst.

The company posted a net loss of RM31.86 million for 3QFY11ended June 30, against a net profit of RM55.6 million the same period a year ago, on the back of a 17.8% drop in revenue. Net losses for the nine-month period totalled RM11.89 million or 0.6 sen per share.

JCY attributed the lower profitability to higher raw material prices, inventory provision resulting from the depreciating US dollar and slow moving stocks.

In addition, it said a labour shortage affected production and increased the direct cost of labour, according to notes accompanying its announcement to Bursa Malaysia.

The lower revenue was mainly due to the lower ASP, lower volume of shipments and depreciating US dollar against the ringgit, said JCY.

JCY shares have rebounded off their lows to 57 sen, and are trading above its net assets per share of 41.6 sen as at June 30, 2011. The stock is down 64.4% from its initial public offering price of RM1.60 in February 2010.

Things haven’t been smooth sailing for Dufu either during the quarter ended June 30, 2011.

Dufu, whose operations are in Penang and Southern China, saw its net profit slump to RM154,000 for its 2Q ended June 30, 2011 from RM605,000 the same quarter last year mainly due to the appreciation of the ringgit against the greenback and increase in raw material prices.

This weaker profitability came despite revenue rising marginally to RM31.81 million during the quarter from RM29.71 million a year ago.

For the six months to June 30, 2011, Dufu chalked up a net profit of RM532,000, or 0.44 sen per share, down from RM4.5 million a year ago.

On an asset valuation basis though, Dufu appears attractively priced. It closed at 33 sen last Friday, less than half its net assets per share of 74.6 sen as at June 30, 2011.
The recent strengthening greenback against the ringgit could help ease some cost pressure for both companies, although how they could contain other cost factors and the impact of the floods on volume sales remain uncertain.

But with Seagate as a major client, with operations that remain largely intact and higher HDD prices on the horizon, JCY and Dufu could be well positioned to gain some benefit from the tighter supply of HDDs going forward.

Written by Yantoultra Ngui Yichen, theedgemalaysia.com