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News Commentary: ALi Corporation (3041 TT/NR/NT$38.2)
Sep.05, 2008
Event: High season is coming, but demanding valuation should not be overlooked(Negative.)
Primasia CommentˇP ALi showed resistance yesterday amid a very weak TAIEX by posting a 3.3% gain. We believe that its possible 30% QoQ sales growth in 3Q08 attracted investors to come in for safe haven. However, we believe fundamentals do not support its current share price level because ALi is likely to post EPS below NT$1.00 this year. Avoid the counter; donˇ¦t chase it while it is high.ˇP ALi is a multimedia IC design company whose product lines include set-top boxes (STB), portable media players (PMP), CD/MP3s and notebook computer camera chips. MediaTek (2454 TT/ Buy/ NT$340.0) is its largest shareholder, with a 20.5% stake.ˇP Sales entered a declining mode in 2008. ALiˇ¦s YoY sales growth was at an astonishing 71% in 3Q07, which sent its share price skyrocketing to NT$140. The momentum could not last, however, as YoY growth dropped to ˇV1% in 1Q08, -21% in 2Q08 and which may possibly remain at ˇV20% in 2H08. Its main product line, STB ICs, is in a stable mode this year and may witness mild growth. It is, however, a very weak PMP market that hampers ALiˇ¦s 2008 performance.ˇP STBs and NB cams have better outlook than PMPs and MP3s. We estimate that half of ALiˇ¦s STB ICs are sold in the PRC and half are sold in the Middle East and Europe. ALi is particularly dominant in the PRC market, with market share growing from 50% in 2006 end to 60% at present. It may possibly reach 70% next year due to slow development by its main peer, Cheertek (delisted), which merged with Novatek (3034 TT/ Hold/ NT$60.8) earlier this year. In NB cams, ALi has about one-fourth the volume in shipments compared to its main peer, Sonix (5471 TT/ NR/ NT$57.6). ALi expects this to grow with the rising NB cam penetration (33% in 2007 to 45%-50% in 2008) and the organic NB shipment growth (20%-25% in 2008). For PMP and CD/MP3 products ALi sees a volatile and presently weak market.
ˇP Gross margin contraction in price war. ALiˇ¦s GM peaked in 4Q07 at 48.7%, dropped to 45.9% in 1Q08 and dipped further to 37.3% in 2Q08, mainly due to a price war in the PRCˇ¦s STB market. The company commented that STB IC ASPs have fallen by an average of 20% since January this year. The company also forecasts GM to remain at 2Q08 levels for the rest of 2008. Nevertheless, ALi holds an advantage over its main peer, Cheertek, and other makers in the PRC by having single chip designs for all its STB ICs. Moreover, it can leverage MediaTekˇ¦s bargaining to source wafers at lower prices.ˇP 3Q08 sales to post 30% QoQ growth but YoY growth still down. Since it is highly exposed to consumer electronics, ALi has very clear seasonality between the first and second halves each year. The company is entering the high season in 3Q08 and expects to post 30% QoQ sales growth (vs. +36% QoQ in 3Q07). However, we would like to point out that 3Q08 and 4Q08 are actually seeing ˇV20% YoY sales growth, and that the company will probably see negative sales growth of 18% for 2008.ˇP 2008 EPS may not reach NT$1, risk/reward unfavorable. The counter is trading at 30x 2008 PE on the Bloomberg consensus (NT$1.0-NT$1.2). We believe, however, that valuation will be even worse as we see downside risk to the EPS consensus. By factoring in 30% and -5% QoQ sales growth for 3Q08 and 4Q08, respectively, and 38% GM and 23% opex for both quarters, we reach an EPS of only NT$0.87. Therefore, despite its strong share price performance yesterday, we see an unfavorable risk/reward ratio for the near future.
Source: Primasia Investment Consultancy Co., Ltd.
Silitech (3311 )
Aug. 29, 2008
No clear signs of a recovery
Weak 2Q08 results. Silitechˇ¦s 2Q08 operating results were weak. Gross margin and operating margin fell to 24.1% and 10.2%, respectively, from 25.5% and 15.3% in 1Q08, mainly due to opex rising from 10% in 1Q08 to 14% in 2Q. Silitech attributed this to a one-time NT$20mn R&D investment expense, coupled with higher development fees associated with new models scheduled to launch in 3Q08. 2Q08 bottom line saved by tax credits. Despite the drop in its operating margin, non-op items and tax credits saved its 2Q08 net income. Silitech posted NT$60mn in non-op income on FX gains of NT$45mn, while its 2Q08 tax rate dropped to ˇV0.4% through tax credits. Strong 3Q08 guidance. Silitech guides the following: 1) double-digit quarterly revenue growth in 3Q08 driven by 25 new models in mass production; 2) 4Q08 revenue should increase QoQ although visibility is very limited; 3) Silitechˇ¦s gross margin and operating margin targets remain unchanged at 25% and 15%, which, nonetheless, are challenging. Industry-wide difficulties continue. We are concerned about Silitechˇ¦s deteriorating profitability. There is no clear signal that the handset keypad industry is heading towards a recovery and no easy solution to its intense competition and margin contraction. Valuation is unattractive; downgrade to Hold. As for valuation, even by factoring in its 3Q08 guidance Silitech is not cheap. We estimate Silitechˇ¦s 2008E EPS of NT$6.5, implying current PE of 14x, which is in the mid-range of its historical trading band. With limited share price upside, we downgrade Silitech to Hold and set our target price at NT$97.5, based on PE of 15x its 2008E earnings.
Source: Primasia Investment Consultancy Co., Ltd.
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