NRA Capital Pte Ltd

Written by: NRA Team

Monday 21 Oct 2013

Cheung Woh Technologies - 2Q14 results review

Tough year for HDD business

2Q14 revenue increased 1.4% yoy but gross profit margins decreased 5.2% pts due mainly to raw material and labour costs. Outlook for the HDD business remains tough for this year.

2Q14 Financial Highlight:

  • Revenue increased 1.4% yoy to S$16m in 2Q14 mainly from increase in HDD components segment which increased 19.3% yoy but offset by sales in Precision Metal Stamping segment which decreased 9.9% yoy.
  • Gross profit margins decreased 5.2% pts to 10.3% in 2Q14 due to increase in raw material costs and labour costs as implementation of minimum wages in Malaysia kicked in. In addition, gross profit margins were lower for HDD components segment.
  • As a result of lower revenues and gross margins, it registered a loss of S$60k in 2Q14 as compared to a net profit of S$550k in 2Q13.

Our View:

Although the group’s performance is showing improvements in its HDD business, the overall industry outlook does not seem favorable. IHS estimates that global HDD market will decline 12% yoy in 2013 to US$32.7b from US$37.1b in 2012.  IHS also expects that 2014 will see a further decline of 4% yoy. However, IHS is expecting a recovery in the HDD business revenues in 2015.

We think it is still too early for a recovery of the group.  Although it is currently trading at historical 0.5x PBR (S$0.142), at the lower end of the 0.4x – 1.3x PBR range of related companies operating in the HDD industry, its peers seem to be performing better in diversifying their product mix away from the HDD segment.  Hence, we believe that even at its low PBR valuations, we do not think it offers a compelling value for now.  However, given its strong balance sheet with net cash on hand, merger and acquisition could be a wild card.

Cheung Woh HDD Components

Source: Cheung Woh

 


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