KUALA LUMPUR: Some hard disk drive (HDD) component makers are receiving a boost after last year’s Thailand floods disrupted the HDD supply chain and resulted in a rise in the prices caused by a drop in production volume.
Certain players, notably JCY International Bhd, stand to benefit from a strong growth spurt in profitability in the near term, say industry observers. However, they reckon that this earnings boost may not last long.
Some industry players believe structural issues continue to plague the HDD industry. Against the backdrop of slowing demand and thin margins as a result of competition from solid state drives (SSD), plus an industry oversupply, the long-term prospects for the HDD industry have not improved much.
Investing interest in Dufu Technology Corp Bhd, Eng Teknologi Holdings Bhd (EngTek) and Notion VTec Bhd has increased, thanks to JCY’s recent announcement that it is likely to see an increase of 1,900% in profits for 1Q2012.
JCY cited higher selling prices as a result of the floods that have caused a supply shortage and the US dollar’s appreciation versus the ringgit. In addition, effective product mix and better cost management helped enhance its earnings.
“We and others in the industry saw an increase in average selling prices (ASP) of about 10% to 20% after the [Thai] floods,” its finance director James Wong told The Edge Financial Daily recently.
While JCY’s profit forecast raises hopes and stock prices of HDD-related companies, analysts warn that it may not hold true for all HDD component manufacturers.
They caution on the sustainability of high margins and profits when the supply chain shortages are rectified.
According to industry observers, JCY was able to capitalise well on the supply chain disruption as it saw increased demand for two of its products — base plates and actuators. These two are the larger parts in an HDD.
Production of these parts was severely disrupted because most of the manufacturers making such parts were located in Thailand, and they were inundated by floodwaters.
This turned out to be a blessing for JCY, whose production plants were not affected by the flood. Thus, JCY, which supplies mainly to Seagate Technology and Western Digital Corp, was able to secure contracts for these components at relatively high prices.
However, companies like Dufu, which produces smaller HDD components, benefited less as these parts saw a smaller increase in prices.
“For smaller parts such as pins, clamps and spacers, production is spread across Malaysia and Singapore. As being smaller, they are cheaper to ship to factories in Thailand,” said an analyst.
“The supply of these parts was not disrupted, unlike bigger parts like base plates and actuators, which are produced in Thailand to lower transport costs.”
While higher prices amid volume compression can only compensate for bigger margins for so long, the higher demand for SDD is seen as a threat to the longer term prospects of HDDs.
With HDD prices now sharply higher due to the shortage problems, it could exacerbate the problem as the price gap narrows between the two memory devices.
OSK Research said Western Digital and Seagate had used this opportunity to raise prices of their HDD products by 50% to 100%, while cutting down warranty periods.
“We believe demand for HDDs could be hampered in the longer term by demand for alternative storage mechanisms, such as cloud computing and hybrid storage,” RHB Research said in a research note on the outlook for semiconductors.
Furthermore, according to MIDF Research’s Byte IT report, the development of cloud computing will result in mobile devices lighter than current smartphones or tablets, and these would be able to access large amounts of Internet data at any given time or place.
“Once cloud computing technology matures, tablets will replace personal computers as the main device for greater corporate productivity,” the report said, implying that the need for HDDs will decline as more SSD-based gadgets emerge in the market.
In the meantime, analysts are awaiting the release of the 4Q2011 results of the local HDD component players, due by end-February, to gauge the financial impact of the floods.
It will be interesting to see if the effects of higher margins due to parts shortages can outweigh the impact of lower volume sales.
This article appeared in The Edge Financial Daily, January 31, 2012.
Certain players, notably JCY International Bhd, stand to benefit from a strong growth spurt in profitability in the near term, say industry observers. However, they reckon that this earnings boost may not last long.
Some industry players believe structural issues continue to plague the HDD industry. Against the backdrop of slowing demand and thin margins as a result of competition from solid state drives (SSD), plus an industry oversupply, the long-term prospects for the HDD industry have not improved much.
Investing interest in Dufu Technology Corp Bhd, Eng Teknologi Holdings Bhd (EngTek) and Notion VTec Bhd has increased, thanks to JCY’s recent announcement that it is likely to see an increase of 1,900% in profits for 1Q2012.
JCY cited higher selling prices as a result of the floods that have caused a supply shortage and the US dollar’s appreciation versus the ringgit. In addition, effective product mix and better cost management helped enhance its earnings.
“We and others in the industry saw an increase in average selling prices (ASP) of about 10% to 20% after the [Thai] floods,” its finance director James Wong told The Edge Financial Daily recently.
While JCY’s profit forecast raises hopes and stock prices of HDD-related companies, analysts warn that it may not hold true for all HDD component manufacturers.
They caution on the sustainability of high margins and profits when the supply chain shortages are rectified.
According to industry observers, JCY was able to capitalise well on the supply chain disruption as it saw increased demand for two of its products — base plates and actuators. These two are the larger parts in an HDD.
Production of these parts was severely disrupted because most of the manufacturers making such parts were located in Thailand, and they were inundated by floodwaters.
This turned out to be a blessing for JCY, whose production plants were not affected by the flood. Thus, JCY, which supplies mainly to Seagate Technology and Western Digital Corp, was able to secure contracts for these components at relatively high prices.
However, companies like Dufu, which produces smaller HDD components, benefited less as these parts saw a smaller increase in prices.
“For smaller parts such as pins, clamps and spacers, production is spread across Malaysia and Singapore. As being smaller, they are cheaper to ship to factories in Thailand,” said an analyst.
“The supply of these parts was not disrupted, unlike bigger parts like base plates and actuators, which are produced in Thailand to lower transport costs.”
While higher prices amid volume compression can only compensate for bigger margins for so long, the higher demand for SDD is seen as a threat to the longer term prospects of HDDs.
With HDD prices now sharply higher due to the shortage problems, it could exacerbate the problem as the price gap narrows between the two memory devices.
OSK Research said Western Digital and Seagate had used this opportunity to raise prices of their HDD products by 50% to 100%, while cutting down warranty periods.
Wong: We and others in the industry saw an increase in average selling prices of about 10% to 20% after the floods.
“We believe demand for HDDs could be hampered in the longer term by demand for alternative storage mechanisms, such as cloud computing and hybrid storage,” RHB Research said in a research note on the outlook for semiconductors.
Furthermore, according to MIDF Research’s Byte IT report, the development of cloud computing will result in mobile devices lighter than current smartphones or tablets, and these would be able to access large amounts of Internet data at any given time or place.
“Once cloud computing technology matures, tablets will replace personal computers as the main device for greater corporate productivity,” the report said, implying that the need for HDDs will decline as more SSD-based gadgets emerge in the market.
In the meantime, analysts are awaiting the release of the 4Q2011 results of the local HDD component players, due by end-February, to gauge the financial impact of the floods.
It will be interesting to see if the effects of higher margins due to parts shortages can outweigh the impact of lower volume sales.
This article appeared in The Edge Financial Daily, January 31, 2012.
