DUFU ... July 09

DUFU TECH SAYS WORST MAY BE OVER FOR HARD DISK INDUSTRY

DUFU TECHNOLOGY CORP, the hard disk maker, which remained profitable for 1QE Mar 2009 despite extremely difficult external conditions says that the worst may be over.

For 1QE Mar 2009, revenue declined by 18% YOY to RM23.1m. PBT dropped 45.3% YOY to RM1.7m and Net Profit fell 57% YOY to RM1.3m. The disproportionate decline in profits versus revenue was due to lower economies of scale, causing PBT margins to fall from 10.9% to 7.3%. The profit decline was expected given the challenging conditions the Company and the HDD industry faced in the first quarter of 2009 as the global recession deepened.

The first quarter is usually a slow period for the hard disk industry coming after the Christmas season. For 2009, this was crimped further by the global recession and reduced consumer spending.

DUFU faced the challenging times with an average capacity utilisation of 50%-60% in the quarter which has since rebounded to 70%-75% in Apr-May 2009 as orders recovered strongly.


INCREASED CAPACITY VIA ACQUISITION
The Company had on Jan 23, 2009 completed the acquisition of FUTRON, a Hong-Kong based HDD company with operations in China, for RM20.5m cash. Of the purchase consideration, RM10m was paid in 1QE Mar 2009, another RM5m to be paid in 2QE Jun 2009 and the balance at the end of the 2009, subject to FUTRON fulfilling a profit guarantee of RM5m.

WORST MAY BE OVER IN 1QE MAR 2009
According to an INSIDERASIA analysis published on Jun 16, 2009, the worst may be over in 1QE Mar 2009. Most export-oriented industries in Malaysia only started feeling the effects of the downturn in 4QE 2008, which extended into a worse performance in 1Q-CY2009. This was also confirmed by export and GDP figures from most Asian countries, including Malaysia.

SALES UP SINCE APR-MAY 2009
Sales are up strongly since April-May. DUFU has already seen the worst in terms of sales in 1QE MaR 2009 ? notably in Jan-Feb 2009, a fact also confirmed by rival NOTION VTEC.

CAPACITY UTILISATION
DUFU's average capacity utilisation dropped to just 50%-60% in the 1Q-CY2009, but has since rebounded to 70%-75% in Apr-May 2009 as orders recovered. Sales in Apr-May 2009 rebounded as much as 50% from the lows in early 2009.

HARD DISK INDUSTRY RESILIENT
The HDD sector has been relatively resilient in the global electronics sector in the recession, with demand driven by the need for storage. However, within the industry, there are also marked differences in performance between the major players, depending on their product, pricing and inventory strategies.

Industry leader SEAGATE TECHNOLOGY has not fared well compared with second player WESTERN DIGITAL. Unfortunately, SEAGATE (directly and via Singapore-based MMI) has traditionally been DUFU's argest customer, accounting for over half its sales in previous years.

LONGER TERM GROWTH PLATFORM
FUTRON provides a platform for longer-term growth. The FUTRON acquisition provides a platform for future expansion, at a very reasonable price. FUTRON produces HDD components, compressor and sensor components and is presently a sub-contract producer for DUFU.

Until the recent crisis, DUFU's 120,000 sq ft factory in Penang was already fully utilised. FUTRON's factory, near Guangzhou, China, has 90,000 sq ft of usable space and a much lower operating cost structure.

The timing of the acquisition although made as the global crisis was picking up speed, the purchase was made at a reasonable price ? at around FUTRON's Book Value and with a Profit Guarantee of RM5m, which can be offset against the purchase price in the event of a shortfall.

SALES TO FALL 18% IN 2009
INSIDERASIA expects DUFU's revenue to fall 18% in 2009 before recovering by 10% in 2010. As a result, we expect a 37% fall in PBT to RM6.6m and a 41% decline in Net Profit to RM6mn for 2009.

INSIDERASIA added that just as profits fall disproportionately more than revenue in 2009, the same applies when revenues recover in 2010. We expect both PBT and Net Profit to rise 47% to RM9.7m and RM8.8m, respectively in 2010.

DUFU was established some 20 years ago and is experienced with economic cycles. The Company's Balance Sheet is very modestly geared. The Company has also established a longer-term production expansion plan ? at relatively lower costs ? through FUTRON to benefit from the eventual recovery.