JCY, Every Dog Has Its Day In The Sun

I am serious, I was writing about JCY at 10am, still gathering information and the stock is running as I write. So I have to be very quick on this. Sometimes you can be so bad, or your price is so bad, that you can be good for a while. The stock should be running based on two major factors:



a) Privatisation - If you remember their IPO price, it has lost more than RM1.10-1.20 from its IPO levels. VCs have been knocking on their doors, especially over the last few weeks as the Euro crisis hit its peak bringing JCY to below 40 sen albeit briefly.

 HDD players valuations as follows:

Notion at 1.3x P/B;

Dufu at 0.5x; and

JCY at 1.3x P/B.

Historical M&As for HDD Component Manufacturers
Acquiree		Acquirer		Date		USD (m)		P/B
Unisteel		KKR		Jun-08		785.0		6.1
Seksun		Supernova		Oct-07		295.0		2.1
Magnecomp		TDK		Aug-07		166.0		1.8
Amtek		CVC		May-07		353.0		1.7
MMI		KKR		Apr-07		666.0		4.0
Brilliant		Nidec		Nov-06		195.0		1.9
							Avg	2.9

The Notion deal was scuttled as owners were rightly asking for a better valuation. The average done deal was 2.9x P/B although most were done prior to the subprime implosion. However, profits are profits. Notion had a strong case as its not a pure HDD player anymore, with better margins coming from their camera business and a strong link up to Nikon. Naturally, JCY has the right size to be an attraction to big VC players in HK.


A privatisation deal could be easily agreed as the controlling shareholders has 74% (YKY).


b) Supply chain disruption - This has more credence. I had been asking around for the past few hours and the Thailand flood situation is very bad. At first, most thought that it was a minor thing and any interruption would be temporary. As you dig deeper, you will find that the situation is quite bad. In fact, anecdotal comments has it that the situation was a lot worse for HDD players operating there than the impact from the nuclear/tsunami in Japan.


I am very shocked that no analyst had grabbed onto the situation and analyse further. The worst affected is Western Digital. This is critical as the affected supply of HDD is enormous. Apparently early estimates had it that Western Digital will be writing off RM6bn-RM8bn from the Thailand situation.


Put it in a more meaningful context: a huge portion of the production of HDD is located in the very area worst hit by the floods in Thailand. Industry sources indicated that at least 30%-35% of the GLOBAL PRODUCTION of HDD has been halted ... I will give you 10 seconds to re-read the last sentence again.


As with the headline, JCY's Thai operations was not affected, in fact, they now have ample spare capacity to take up some of the slack. Players have indicated that customers are now "scrambling madly" for their orders to continue at premium prices. JCY is a prime beneficiary.



Notion's Thai factory is affected but thankfully its Klang operations has some spare capacity plus their camera side is still doing well. Eng is badly hit, insurance does not cover profits lost.


c) Circumstantial positives - JCY should start to benefit from a gradual improvement in volume from its two major customers ... wait for it, yes its Seagate and Western Digital. Western Digital's recent merger with HGST and Seagate's merger with Samsung actually now propels JCY onto the "gap to be filled". JCY's teething problems with their Guangdong now looks to be a huge blessing for JCY.


d) Out of the Loop - Look at the factors surrounding JCY ... its a totally different element when you look around you: Euro-crisis, China slowing, ECB stalling, Fed not knowing what to say, Malaysia GE13, etc... JCY is in the "zone" as they say, untouchable (for now..lol).





Look at the chart, the stock has not seen daylight ... ever. The recent whack down from 55 sen to below 40 sen was thanks to the Euro situation. Even the Thailand floods did NOT see any strong buying .... TILL TODAY. I guess I am not the only one digging deep enough. 60 sen-66 sen seems easy.



NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees. The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

What's Down With JCY???

JCY is in a bear market on its own. What gives?

1) Announcement
Subject
:
JCY INTERNATIONAL BERHAD ("JCY” OR “COMPANY")
- Extension of Time to Obtain Completion and Compliance Certification

Contents
:
We refer to the approval letter dated 26 January 2010 (“Approval Letter”) from the Securities Commission (“SC”) for the listing of JCY on the Main Market of Bursa Malaysia Securities Berhad. Condition 1.2 (ii) imposed by the SC in the Approval Letter states that with regards to the property located at Plot 296 (PTD 63734), Tebrau IV Industrial Area, Mukim Tebrau, 81100 Johor Bahru, Johor Darul Takzim (“Property”), JCY is to obtain the Completion and Compliance Certification (“CCC”) within six (6) months from the date of the said Approval Letter.

On behalf of the Company, we wish to announce that an application for an extension of time of six (6) months up to 25 January 2011 for JCY to obtain the CCC from the relevant authorities in relation to the Property (“Proposed Extension of Time”), has been submitted to the SC and is currently pending the decision of the SC.

An announcement will be made upon receipt of the decision of the SC.

This announcement is dated 3 August 2010.
(A negative factor but does not explain the price weakness)


2) Some employees strike at Tebrau factory.
Press Release
In response to the recent foreign workers issues at JCY HDD Technology Sdn. Bhd.’ssub-contractor hostels at Kawasan Perindustrian Tebrau IV, Johor Bahru, both the company and the foreign worker representatives have met this afternoon and the issues had been resolved amicably with the workers returning to work immediately. Among the key issues highlighted by the foreign workers, the management had in conjunction with the sub-contactor for the hostel, shall take remedial actions as summarized below:
1. Company will provide a vehicle and driver on 24 hour standby at the main hostel to facilitate the emergency transportation of worker to hospital for any emergency treatments.
2. The company had agreed to revise and standardize the pay structure of the workers.
3. The criteria for the deduction of salary in relations to worker coming to factory late shall be revised and improved.
4. On top of the normal workmen compensation benefits, the company had agreed to improve the contribution to the beneficiary of the worker.
(Seems to have been resolved over the past few days)

3) CIMB had earlier estimated RM359m in profits for 2010, but 3 quarters now and profits is only RM198m, will not be getting close to CIMB's optimism. Mind you CIMB has also predicted RM441m profit for 2011. Recently CIMB did some updates: 2010 earnings is now lowered to 297.3 million and fy 2011 earnings is now lowered to 370.8 million, but damage is done and is unrealistic. How is the company going to post a RM95m in the 4Q??? Hence the downgrade is also suspiciously optimistic.
(This may explain some selling)

4) The continued paying down of debts owed to owner by the company, which has the net effect of a negative cash flow.
(This does not bode well in the midst of a weakening stock)



5) No activity to shore up share price. Everybody's mum, no buybacks.
(The silence is deafening as they say)

6) Its a cyclical stock. There are similar valuations of just 3x-5x earnings. It looks likely a base will be found at 65-75 sen, even then its not excitingly cheap.

7) The iPad effect. Primary losers: (1) Microsoft, given the impact of lost Windows sales and its lack of a competitive tablet response, (2) Intel and AMD, as they suffer lost unit volumes to ARM-based competitors, (3) HDD makers, Marvell, LSI given the move to solid state storage from hard drives in tablets. Secondary losers: Micron, Acer, ASUSTeK, Barnes & Noble, RadioShack, Best Buy.
(This weighs down JCY again)


NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

JCY's New Pricing

JCY looks likely to slash its IPO price to RM1.60 from an earlier indicative RM2.00. At RM1.60, its a good price level to get in. I still think its fair value is at RM1.80. Enough said.

-------------

StarBiz: Malaysian disk-drive component maker JCY International is to slash the size of its initial public offering after pricing it at the lower end of an indicated range, according to people with knowledge of the matter. The cut comes after the company priced the institutional tranche of the offering at RM1.60 a share in a bookbuilding.

Based on the offer price, the IPO values the company at nine times 2010 earnings and is within the 8-10 times valuation of local and listed competitors in Singapore and Taiwan.

“Books are covered slightly over one time at the low end of the range at RM1.60,” said one source.

Sources, who could not be named because they were not authorised to speak to the media, said the company plans to cut the offer size because the strike price had fallen short of expectations.

“The allocation for institutional portion will be slashed to about 300 million shares from 470 million. The offer for sale is now less than the original size of 530 million shares,” said one source familiar with the deal terms.

A second source confirmed the cutting of the offer size, saying that the new offer size would now be 470 million shares, including both the institutional as well as the retail tranche. In its prospectus issued earlier this month, JCY said it would sell 470 million shares to institutional investors and 59.9 million shares to retail investors who would buy the shares at a 5% discount to the institutional price.

At RM1.60 and selling just 470 million shares, JCY will raise only RM750mil, compared to its target of raising up to RM1.2bil to make the sale the largest tech IPO in South-East Asia since 2000. Proceeds from JCY’s offer will go directly to its selling shareholder YKY Investments Ltd, whose sole director is 54-year-old Yong Yoon Kiong, founder of JCY.

UBS and CIMB are joint managing underwriters and bookrunners for the IPO.

“Undoubtedly, JCY is a great company operating in a steady growing industry (but) in terms of valuation of the IPO, we do not think there is much premium left for potential subscribers in the near term,” said OSK Investment Bank in an IPO note.

JCY made a net profit of RM207.3mil in fiscal 2009, and is forecasting 73% more profit in the current financial year.

p/s photo: Rannes Man