After a particularly weak second quarter, Dufu Technology Corp showed improvement in its results for 3QFY11 as a result of better sales, while the weaker ringgit placed less pressure on margins.
However, the recent floods in Thailand have thrown out new uncertainties for the global hard disk drive (HDD) production and supply chain. This will have an impact on Dufu and HDD players in the coming quarters. Having said that, we also note that the stock is already trading at a steep 54% discount to its net assets of 78 sen per share.
Dufu’s net profit for 3QFY11 declined 6.9% year-on-year to RM714,000 from RM767,000, although revenue increased 27% to RM34.45 million. This was primarily due to lower margins as the ringgit strengthened against the US dollar over the past year.
Compared with 2QFY11 though, net profit improved from just RM154,000 while revenue increased 8% from RM31.8 million. The improvement was due to new orders secured as well as better margins as the ringgit depreciated sharply in 3QFY11 following the global financial turmoil.
For the first nine months of 2011, revenue rose 8.3% to RM97.6 million. However, net profit declined 76.4% to RM1.25 million, or 1.04 sen per share, from RM5.27 million. The steep decline was due to a high base in the first half of last year, before the industry’s downturn began in mid-2010.
The nine-month results matched our full-year net profit forecast of RM1.3 million. The company had net debt of RM41.76 million as at Sept 30, equivalent to a net gearing ratio of 44.7%.
While results for the first three quarters of the year have equalled our full-year projection, we are keeping our forecasts unchanged amid a challenging fourth quarter.
The fourth quarter has traditionally been the strongest for Dufu and the HDD industry due to pre-Christmas seasonal orders. However, this year will be very different due to the recent massive flooding in Thailand, which has disrupted the global HDD supply and production chain.
The impact of the flooding is creating a global shortage of HDDs that could well persist until end-2012, Seagate Technology CEO Stephen Luczo recently warned.
Dufu also acknowledged these problems, noting that the economic uncertainties coupled with the Thai floods will impact sales of its HDDs by approximately 50%. As HDDs account for about 80% of Dufu’s sales, it expects a decline of 30% to 40% of its total revenue in the coming quarter.
It noted that the actual impact will be more visible and ascertainable only by the end of the year. Management acknowledges that the global shortage of HDDs has pushed prices up, but the volume decline due to a breakdown in the supply chain and closure of factories in Thailand will negate these gains.
Recent press reports suggest HDD prices have risen 20% to 25% following the floods.
Indeed, the Thai floods have eclipsed all the earlier concerns surrounding the sector, such as the HDD versus solid state drive argument, as well as inventory and pricing pressure issues.
They have also negated any positive effect from the industry consolidation exercise undertaken earlier this year, as well as the ringgit’s recent weakening against the US dollar, which helps lift margins for component suppliers like Dufu, whose sales are mostly denominated in the greenback.
To recap, the global HDD sector has been hard hit by the recent flooding in Thailand because a huge portion of the supply chain is situated in the country’s worst hit areas. Western Digital has announced a halt to its production in Thailand, although Seagate continues to operate.
Malaysian HDD component makers that have operations in that country, such as Eng Teknologi Holdings Bhd and Notion VTec Bhd, have also stopped their Thai operations. Western Digital expects its December quarter revenue to fall 60% from a year ago as some 60% of its HDDs are produced in Thailand.
The extent of damage to the HDD factories and machinery, as well as recovery plans, is still unclear.
Before the floods arrived, the industry’s macro prospects were expected to improve following two consolidation exercises announced earlier this year, that aimed to cut the world’s HDD makers to just three from five and put 90% of the global market in the hands of the top two players — Western Digital and Seagate.
Seagate had announced the acquisition of Samsung Electronic’s HDD business in April this year, just a month after Western Digital’s takeover of Hitachi Global Storage Technologies.
The industry consolidation exercise is likely to be positive in the long run, as it will reduce price discounting, and reduce volatility in capacity and inventory conditions, which has plagued the industry over the past year. Hitachi, for instance, was reportedly the most aggressive in initiating price cuts.
To reduce reliance on the HDD segment, Dufu is taking more aggressive steps to diversify its product base and is moving into the manufacture of medical components. Management says the move is progressing well, although the results will likely be more evident next year.
Dufu is embarking on manufacturing medical components for orthopaedic medical devices, a fast growing market with relatively high margins. Orthopaedic fixation devices and instruments assist in attaching fractured or broken bones, as well as torn ligaments and tendons.
The non-HDD segment, which accounts for about 20% of revenue, has largely focused on components for the telecom, industrial safety and sensor sectors, and metal stamping, which provide relatively low margins. This is unlike Notion, which enjoys high margins from its camera segment.
Note: These reports are brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, December 1, 2011
However, the recent floods in Thailand have thrown out new uncertainties for the global hard disk drive (HDD) production and supply chain. This will have an impact on Dufu and HDD players in the coming quarters. Having said that, we also note that the stock is already trading at a steep 54% discount to its net assets of 78 sen per share.
Dufu’s net profit for 3QFY11 declined 6.9% year-on-year to RM714,000 from RM767,000, although revenue increased 27% to RM34.45 million. This was primarily due to lower margins as the ringgit strengthened against the US dollar over the past year.
Compared with 2QFY11 though, net profit improved from just RM154,000 while revenue increased 8% from RM31.8 million. The improvement was due to new orders secured as well as better margins as the ringgit depreciated sharply in 3QFY11 following the global financial turmoil.
For the first nine months of 2011, revenue rose 8.3% to RM97.6 million. However, net profit declined 76.4% to RM1.25 million, or 1.04 sen per share, from RM5.27 million. The steep decline was due to a high base in the first half of last year, before the industry’s downturn began in mid-2010.
The nine-month results matched our full-year net profit forecast of RM1.3 million. The company had net debt of RM41.76 million as at Sept 30, equivalent to a net gearing ratio of 44.7%.
While results for the first three quarters of the year have equalled our full-year projection, we are keeping our forecasts unchanged amid a challenging fourth quarter.
The fourth quarter has traditionally been the strongest for Dufu and the HDD industry due to pre-Christmas seasonal orders. However, this year will be very different due to the recent massive flooding in Thailand, which has disrupted the global HDD supply and production chain.
The impact of the flooding is creating a global shortage of HDDs that could well persist until end-2012, Seagate Technology CEO Stephen Luczo recently warned.
Dufu also acknowledged these problems, noting that the economic uncertainties coupled with the Thai floods will impact sales of its HDDs by approximately 50%. As HDDs account for about 80% of Dufu’s sales, it expects a decline of 30% to 40% of its total revenue in the coming quarter.
It noted that the actual impact will be more visible and ascertainable only by the end of the year. Management acknowledges that the global shortage of HDDs has pushed prices up, but the volume decline due to a breakdown in the supply chain and closure of factories in Thailand will negate these gains.
Recent press reports suggest HDD prices have risen 20% to 25% following the floods.
Indeed, the Thai floods have eclipsed all the earlier concerns surrounding the sector, such as the HDD versus solid state drive argument, as well as inventory and pricing pressure issues.
They have also negated any positive effect from the industry consolidation exercise undertaken earlier this year, as well as the ringgit’s recent weakening against the US dollar, which helps lift margins for component suppliers like Dufu, whose sales are mostly denominated in the greenback.
To recap, the global HDD sector has been hard hit by the recent flooding in Thailand because a huge portion of the supply chain is situated in the country’s worst hit areas. Western Digital has announced a halt to its production in Thailand, although Seagate continues to operate.
Malaysian HDD component makers that have operations in that country, such as Eng Teknologi Holdings Bhd and Notion VTec Bhd, have also stopped their Thai operations. Western Digital expects its December quarter revenue to fall 60% from a year ago as some 60% of its HDDs are produced in Thailand.
The extent of damage to the HDD factories and machinery, as well as recovery plans, is still unclear.
Before the floods arrived, the industry’s macro prospects were expected to improve following two consolidation exercises announced earlier this year, that aimed to cut the world’s HDD makers to just three from five and put 90% of the global market in the hands of the top two players — Western Digital and Seagate.
Seagate had announced the acquisition of Samsung Electronic’s HDD business in April this year, just a month after Western Digital’s takeover of Hitachi Global Storage Technologies.
The industry consolidation exercise is likely to be positive in the long run, as it will reduce price discounting, and reduce volatility in capacity and inventory conditions, which has plagued the industry over the past year. Hitachi, for instance, was reportedly the most aggressive in initiating price cuts.
To reduce reliance on the HDD segment, Dufu is taking more aggressive steps to diversify its product base and is moving into the manufacture of medical components. Management says the move is progressing well, although the results will likely be more evident next year.
Dufu is embarking on manufacturing medical components for orthopaedic medical devices, a fast growing market with relatively high margins. Orthopaedic fixation devices and instruments assist in attaching fractured or broken bones, as well as torn ligaments and tendons.
The non-HDD segment, which accounts for about 20% of revenue, has largely focused on components for the telecom, industrial safety and sensor sectors, and metal stamping, which provide relatively low margins. This is unlike Notion, which enjoys high margins from its camera segment.
Note: These reports are brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, December 1, 2011
