Hana Microelectronics

Hana Microelectronics Plc (HANA)

Investment thesis
At the analyst meeting yesterday, management’s tone was cautiously optimistic. HANA guides that 4Q13 sales will rise YoY (driven by stronger numbers at the Ayutthaya plant) but slip seasonally QoQ. There was slightly negative news with regard to hiccups at expansion projects that prompted us to trim our FY14 core profit forecast by 3%. However, we still expect HANA to achieve hefty core earnings growth of 35% next year. The stock currently trades at an FY14 core PER of 9.7x against an average of 10x for our coverage, but its dividend yield of 6.9% is the highest among the four electronics firms. Our BUY rating stands. 
External demand remains strong
The SEMI North American semiconductor equipment book-to-bill ratio, a leading indicator for the industry, declined to 0.98 in August and 0.97 in Sept, but then picked up to 1.05 in October. The implication is that IT demand weakened, but is recovering. HANA guides for a QoQ softening in sales of both ICs and PCBAs in 4Q13, though that is mostly seasonal in nature—its customers normally cut production ahead of the Christmas-New Year festive season, so pare back orders ahead of that time. The firm’s QTD utilization rate has fallen to 80-85% from 90-93% in 3Q13. However, management guides for YoY growth in both IC and PCBA sales in 4Q13, driven by orders for automotive applications.
Project delays, but FY14 core profit should still post 35% growth
The start-up date for the plant in Cambodia has been postponed six months to 4Q14, due to bureaucratic red tape. Note, however, that we hadn’t factored revenue from Cambodia into our model. New capacity in Lamphun Branch 2 will commence operating on schedule in 2Q14. Unfortunately, the firm failed to reach agreement with a big client that had expressed an interest in buying about half the output of the plant. As such, HANA plans to move production for an existing (non-automotive) customer to Lamphun 2 and use the freed up space at the old plant to expand an automotive componentry line.
We have trimmed our FY14 core earnings projection by 3% to factor in a diminished assumption for sales from the new plant. As such, our YE14 target price declines slightly to Bt28.5 from Bt29.1 previously. Nonetheless, our revised model still points to YoY core profit expansion of 35% in FY14, driven by a full year of black ink at the Ayutthaya plant and rising automotive componentry sales.
Scope for upside from insurance payout
Since 4Q11, HANA has booked insurance payouts totaling Bt1,043m. A claim for inventory damage of Bt190m is nearly finalized and should be paid by 4Q13. A payout for business interruption (BI) of Bt1bn was agreed by the insurance firm, but has the reinsurer has yet to pay up. HANA expects the BI claim to be paid some time in 1H14.