THE BUZZ
Malaysian Reserve reported that during yesterday's EGM,
Notion has indicated its intentions to
set up manufacturing operations in China to cater for the growing demand for
its hard disk drive (HDD) components.
OUR TAKE
More on China venture. We understand that Notion will
initially rent a factory in Dongguan, China by end-2012 and it is looking to
fork out some RM5m-RM10m to kick start its operations in China. This venture is
expected to contribute up to 3.5% (RM8mRM10m) of its total sales next year.
Management may also consider purchasing
the manufacturing line upon gaining operating momentum, somewhat akin to its
purchase of a piece of land with an industrial factory in Klang that amounted
to RM17.5m last month.
Wooing Seagate.
We think the China foray aims to take advantage of the pent-up demand for components from
Seagate which has manufacturing plants in both Wuxi and Guangzhou, China. JCY
is also embarking on similar move to expand its operations in both Suzhou and
Foshan, China by increasing the manufacturing floor space and adding computer
numerical control (CNC) machineries,
with the aim of reducing long-term logistic costs within the HDD supply
chain. We believe another motivation to venture into China could be the need to
diversify one’s geographical exposure to mitigate the risk of catastrophic
events, like the severe flooding in
Thailand, which could paralyze day-today business operations.
Maintain TRADING BUY
at FV of RM2.41. No changes were
made to our financial forecasts as we deem the revenue contribution immaterial
for now. We reiterate our TRADING BUY recommendation on Notion with a fair
value (FV) of RM2.41/share ascribed to 8x CY12 PER. We continue to like the
stock following the inclusion of three new
Japanese HDD customers into its client base, which would, in turn, boost
its profitability moving forward.
Source: OSK188
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