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Sunny Days Ahead For Technology Industry As Thailand Floods Subside
Malaysia Perspective | 12 January 2012

By Cecelia Kong

As Thailand dries up from its recent spat of floods, stock brokers are optimistic that the hard disk market that had been hit earlier by the flood is now well on its way to recovery. With prices pushed up due to the supply shortage brought on by the flood, analysts are expecting the industry will enjoy a rebound in the short run.

Brokerage OSK Investment Research forecasts a rosy overall outlook, and thus upgraded its investment rating for tech stocks to “Neutral.”

In its sector analysis report, OSK Investment Research reasoned that, “Primarily, the investment risk in the technology sector has begun to subside, so full production is expected to resume by 3Q12.”

Currently, major hard disk producers like Western Digital and Seagate Technology have been gradually ramping up their production to their original capacities. Even though their outputs have yet to meet market demands, their product prices have risen, and that will definitely bolster the industry players’ profits and turnover.

“For this reason, the major manufacturers have expressed confidence in the future quarter, and we are also optimistic about the prospects for the tech sector.”

Statistics showed that hard disk prices have risen by 50% to 100% since the outbreak of the flood in Thailand in October 2011. Analysts believe that industry heavyweights like Western Digital and Seagate Technology will push further for higher prices.

On the other hand, industry players have also indicated that in order to drive down overheads, they are cutting their hard drive warranty periods from the original 3 to 5 years down to between 1 and 3 years.

JCY International said that the Group’s production lines have resume normal operations, but due to the supply shortage caused by the Thai floods, they will need to adjust the prices of their products accordingly.

On the other hand, OSK Investment Research pointed out that now is the best time for JCY International to expand its market share, apart from lifting its profit margins by raising their prices.

“We expect JCY International to reap RM378.4 million and RM280 million in profits for FY12 and FY13 respectively.”

OSK Investment Research has set the target price for JCY International at RM1.30, while giving it an investment rating of “Trading Buy”.

“We are giving them a ‘Trading Buy’ mainly because we believe that JCY International’s sales figures will increase substantially in the coming quarters.”

In addition, OSK Investment Research justified its ‘Trading Buy’ call on the basis that the Group’s hard disk production is expected to return to normal capacity by the third quarter of 2012.

Over at Notion Vtec, its Board has expressed hope that by the first quarter of 2012, production can be restored to the level before the flood.

Along with its peers, Notion Vtec had to ramp up its plant output in Malaysia during the Thailand flood so as to meet market demands.

Accordingly, Notion Vtec’s equipment repairs bill came up to less than RM10 million, of which 60% is expected to be paid for by its insurance company.

OSK Investment Research reported that, “Notion Vtec’s earnings and profit margins are expected to slide in the last quarter of this fiscal year and continue into the first quarter of FY12. However, with the Group actively fighting to resume normal production, we have also adjusted its outlook for next year.”

OSK Investment Research has revised its rating for Notion Vtec from “Sell” to “Neutral”, with a target price set at RM1.69.

Looking at Engtek, the company had announced that it has completed repairs at its plant in Thailand, and is only waiting for power supply to resume.

OSK Investment Research believes that the Group will actively ramp up the production output of its Malaysian and the Philippines plants.

In its report on the group, OSK Investment research said, “We understand that Engtek is actively purchasing new machines and equipment. Its first batch of production is expected to ship in the first quarter of 2012. We are optimistic about the Group’s prospects.”

OSK Investment Research pointed out that together with the expected hike in hard disk prices that will stimulate the Groups’s short-term turnover, it has revised the Group’s rating from a “Sell” to “Neutral.”

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