JCY International’s setback not reflective of entire HDD market

TheEdge Tue, Feb 02, 2021 05:00pm - 3 months ago


RECENT news about hard disk drive (HDD) maker JCY International Bhd losing a major customer has put investors on the alert. There are concerns that a scaling back on buying by HDD producers as they embark on a rationalisation of their supply chain may hurt the market.

Apart from Johor-based JCY, the two other listed HDD players are Dufu Technology Corp Bhd and Notion VTec Bhd.

Industry experts are of the view that JCY’s announcement does not reflect the situation in the entire HDD market, citing competition and pricing as possible reasons for the JCY customer’s decision. No reason was provided by JCY in its Bursa Malaysia filing on Jan 14 for its customer’s gradual pullout and the company did not respond to The Edge’s requests for comment.

“Execution is key, such as fulfilling quality requirements set by the customers,” a technology analyst tells The Edge.

It is worth noting that there are various mechanical components in HDDs, with JCY mainly involved in producing base plates while Dufu and Notion manufacture disk spacers. The components are then supplied to three HDD giants, namely Seagate, Western Digital and Toshiba. Global HDD shipments fell 18.8% year on year in the first half of 2020.

JCY’s product offerings differ from competitors

A market observer says the advantage enjoyed by Dufu and Notion is that demand for disk spacers increases in tandem with storage capacity.

“That is why we see healthy growth for the next two years at least, especially enterprise servers for cloud computing in a post-pandemic era. The size of the data collected is getting bigger,” he tells The Edge.

However, for base plates — in which JCY has a presence — the growth goes in tandem with the unit of shipment, which has been falling over the years because low-end HDDs are being replaced by solid-state drives (SSDs), which are faster, lighter, more durable and consume less energy.

“The unit of shipment for HDDs is down 10% every year. Today, we don’t talk about the unit of shipment, but it is calculated based on the amount of storage, which has been growing 30% per year since 10 years ago.

“The storage growth will be even higher in the next five years, driven by the work-from-home arrangements because of the pandemic. Technological advancements such as 5G will also spur the expansion in the HDD segment. It is expected that data expansion will grow 40% in the next five years,” says the market observer.

He adds that the exponential growth in data has prolonged the life span of HDDs. “As such, HDD component manufactures are focusing on higher-end HDDs catering for enterprises.”

While SSDs are seen as a threat for HDDs, he thinks that more time is needed for the SSD segment to catch up, on the back of the huge investment cost involved.

“Despite the SSD price coming down in the past two years, the cost of ownership for a higher version of HDD is still 10 times cheaper than that of SSD. Bear in mind that as the SSD technology evolves, so does the HDD technology,” he explains.

Enterprise HDD to support growth

Overall, the market observer does not foresee a structural change to the HDD segment, as demand from the enterprise sector is still growing, albeit with shrinking orders from the consumer side.

An analyst agrees, saying that enterprise hubs such as Google will not choose to change to SSDs entirely because of the cost-efficiency consideration. “It is not just about the storage issue, but they have to take into account other factors such as electricity voltage and back-up system. I don’t think the price gap between HDDs and SSDs will be closed anytime soon.”

The analyst believes enterprise HDDs will continue to be the target market for HDD component manufacturers. At the same time, it will be tough for these manufacturers to venture into the SSD market due to the huge differences in internal components.

The HDD segment contributes 80% to Taiwanese-run Dufu’s top line. Its non-HDD segment includes building precision metal components for sensors and control devices, as well as offering metal stamping products.

While non-HDD margins are higher, Dufu also enjoys economies of scale from mass production in the HDD segment, says the market observer, who understands that the company has set a revenue target of RM300 million this year.

Dufu’s net profit rose 25.4% to RM36.9 million for the first nine months of 2020 (9MFY2020), from RM29.41 million in the same period a year earlier, on revenue of RM212.31 million, driven by increased demand for HDD components.

This was despite a 13% drop in its net profit for 3QFY2020 to RM12.86 million from RM14.78 million a year ago, on unfavourable foreign exchange losses.

Riding the wave of enthusiasm for technology stocks, the share price of Dufu has been on an uptrend, hitting an all-time high of RM4.04 last Wednesday. Its Taiwanese executive director Wu Mao-Yuan took the opportunity to dispose of three blocks of shares this month at average prices of RM3.2112, RM3.50 and RM3.54 each, paring his stake to 3.55% from 3.6% at the end of last year, according to exchange filings.

Dufu’s major shareholder Perfect Commerce Sdn Bhd also trimmed its stake slightly to 9.85% from 9.91% as at end-September 2020.

In contrast, JCY was in the red for the financial years ended Sept 30, 2018 (FY2018) and FY2019, with net losses of RM112.1 million and RM54.2 million respectively, owing to lower shipments. In FY2020, it returned to the black with a net profit of RM25.6 million.

JCY’s loss of its major customer is expected to have a negative impact on its financials, with possible impairment provisions for FY2021. In response to that, it said a major realignment of its customer base has commenced.

Shares in JCY have been trading below 60 sen after they spiked to 78 sen last November. The stock settled at 48.5 sen last Friday, valuing the company at RM1.03 billion.

Notion’s share price, meanwhile, has more than halved from its peak of over RM2 in August that was fuelled by its foray into the personal protective equipment (PPE) business. It closed at 89.5 sen last Friday, giving the company a market capitalisation of RM461.02 million.

Notion saw its net profit slip 16.6% to RM6.29 million for the financial year ended Sept 30, 2020 (FY2020) compared with RM7.54 million in FY2019. Currently, only 40% of its top line is derived from the HDD business.

“We are diversified and prepared for changes. EMS (electronics manufacturing services) and PPE are our growth businesses,” Notion executive chairman Thoo Chow Fah says in a brief reply to The Edge, when asked if he is concerned about the HDD development going forward.

Last year, Notion announced its diversification into the production and trading of gloves, which is envisaged to be a major contributor to the company’s earnings in the future. It is also involved in the face mask manufacturing business.

 






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