Hana Microelectronics

Hana Microelectronics Plc (HANA)

Core profit beat all estimates
HANA reported a 2Q13 net profit of Bt1,012m, up by 601% QoQ and 45% YoY. The number was 2% above our estimate and 64% higher than the Bloomberg consensus. Stripping out extra items, core earnings would be Bt406m, up by 8% YoY and 862% QoQ—54% above our estimate and 127% ahead of the consensus. The better core number was due largely to a fatter gross margin than modeled. 
Results highlights
The top-line rose 18% QoQ on seasonality and a weaker baht, but fell 9% YoY on lower orders, as customers reduced inventory days in order to mitigate financial risk in a weak external demand environment. PCBA sales slipped by 7% YoY and IC sales by 2% YoY. GM was 11.5%, far above our assumption of 7%, but down from 12.8% in 2Q12, due to higher raw material costs and wage bills. However, on a QoQ basis, GM jumped 6.7% on a weaker baht and lower fixed costs per unit.  Despite higher staff costs, the SG&A/sales ratio dived 90 bps QoQ to 5.4% on rising sales (and also plunged 170 bps YoY, due to the absence of flooding-related expenses).
HANA also booked a huge insurance payout of Bt713m, which far outweighed the effect of its Bt106m FX loss. The balance sheet remains in substantial net cash position of Bt4bn with a D/E ratio of only 0.2x. The firm has the capacity to pay good dividends.
Outlook
We expect HANA's core earnings to rise QoQ in both 3Q13 and 4Q13. In 3Q13, GM should improve further on seasonally high sales volume, which would reduce fixed costs per unit. In 4Q13, the Ayutthaya plant is slated to break even and sales volume is anticipated rise further. Management guides that a customer is shifting its strategic focus to the tablet component market (which has greater scope for growth than the PC component market), which will add to HANA’s sales in the fourth-quarter.
What’s changed?
We have upgraded our FY13 core earnings forecast by 27% to Bt1,574m, as we have increased our GM assumption from 8.5% to 10.5%. As such, our YE13 target price rises from Bt20.10 to Bt24.80, pegged to a core PER of 12.7x (1.5 SD above long-term).
Recommendation
HANA currently trades at a core PER of only 10.5x, 20% below the 12.7x mean of our Electronics coverage. As our concerns about GM slippage have eased and the dividend yield of 7.8% will support against stock price downside risk, we have upgraded our call from SELL to BUY!