Hana Microelectronics

Hana Microelectronics Plc (HANA)

Investment thesis
At the analyst meeting yesterday, management expressed confidence in HANA’s forward profitability profile. Demand for both ICs and PCBAs started recovering in 3Q13 and momentum looks set to be sustained into 2014. The factory in Ayutthaya will probably break even in 3Q13 (we and the street had earlier assumed 4Q13) and baht depreciation will boost the bottom-line. Valuation-wise, HANA currently trades at an FY13 core PER of 10.4x against a peer average 10.8x. Moreover, its dividend yield for FY13 of 8% (the highest of our Electronics coverage) will support the stock price in the face of SET weakness. Our BUY rating stands. 
External demand recovery
Management anticipates a strong demand recovery in 2H13, as customers have started reloading inventories after two quarters of weak orders. There appear to be twin drivers at work here—inventory depletion and a better global economic growth outlook (the Bloomberg consensus forecasts are 1.7% in 2Q13, 2.3% in 3Q13 and 2.7% in 4Q13). We also expect HANA’s IC orders to increase in 3Q13, as IC export data have improved from an 8% YoY contraction in 5M13 to growth of 23% YoY in June and 16% YoY in July—the trend looks sustainable.
Much stronger operational earnings for 2H13 …
Core profit will jump by 113% HoH and 82% YoY in 2H13, driven by strong sales and GM expansion, according to our model. With the IC demand recovery building momentum, the Ayutthaya plant now looks set to post black ink in 3Q13, rather than our earlier assumption of 4Q13. PCBA demand should also rise HoH, driven by PCBAs for automotive applications and PC componentry. Moreover, HANA will benefit from baht depreciation. Our sensitivity analysis indicates that its net profit will rise by 4% for every Bt1 the Thai currency weakens against the US dollar.
…and a further insurance payout = scope for an interim dividend
Since 4Q11, HANA has booked insurance payouts totaling Bt1,042m. The firm expects further payouts of Bt190m for inventory damage (in 3Q13) and Bt1bn for business interruption (some time in 2H13). The payouts will strengthen its financial position and enable it to pay an interim dividend (we anticipate a DPS in the range of Bt0.3-0.5).
…New capacity to COD in 2Q14
HANA is currently expanding production capacity at three locations—Jiaxing, Lamphun Branch 2 and a greenfield factory in Koh Kong, Cambodia. We roughly estimate that the three projects will add 60% to total capacity (COD in 2Q14). Management guides that two big clients have expressed interest in taking about half the output of Lamphun Branch 2 (the plant will boost HANA’s capacity by 26%). The firm has cut its capacity expansion CAPEX guidance from Bt1.8bn to Bt1.4bn.