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Hana Microelectronics

Strong PCBA demand prompts core earnings forecast upgrade

Hana Microelectronics Plc (HANA)

Investment thesis

HANA will sustain strong earnings growth through FY14, we believe. As such, we have upgraded our FY14 core profit forecast by 3% to fine-tune for an expanded expectation for 1H14 PCBA sales. Orders for touchpads have continued from 4Q13, so we don't expect a first-quarter seasonal decline this year. Heavy orders are likely to be sustained into 2Q14. Looking to 2H14, an HoH pick-up in IC sales will boost earnings growth, whilst the loss at the new factory will be insignificant. Moreover, a huge expected insurance payout would mean upside to our FY14 model. Our new YE14 target price of Bt30.50, up from Bt28.50. BUY!

PCBAs are driving 1H14 sales growth; ICs will lead the 2H14 top-line

Overall demand is improving, especially for PCBAs (the PCBA utilization rate currently exceeds 90% against 85% in 4Q13). PCBA revenue normally drops QoQ in the first-quarter on seasonality. But the traditional pattern isn't playing out in 1Q14. HANA guides for rising orders for touchpads (clients reduced inventories too sharply during the market slowdown and must now re-stock), smart phone sensors and automotive LEDs. This strong demand looks set to be sustained into 2Q14. As for IC packaging services, the firm guides for a seasonal low in 1Q14, but it now sees positive signs—IC packaging demand is likely to recover in late March onward.

HANA is currently in talks with a big client that needs IC capacity to support a new line of semiconductors. If HANA were to seal a deal, it would start seeing revenue in 4Q14 and its IC utilization rate would be almost 100%.

Lamphun 2—only small losses under worst-case scenario

Construction of the Lamphun 2 plant (equal to 25% of existing capacity) is moving ahead. Management expects construction to be finished by June, 2014 and revenue to start in 4Q14, assuming that new orders arrive. Even under the worst-case scenario where initially there are insufficient orders to justify commissioning the plant, we would expect Lamphun 2 to post only modest losses (depreciation on buildings of ~Bt13m/quarter would squeeze GM by just 30 bps, we estimate. There are no depreciation costs for machinery & equipment, as HANA won't invest in machinery till it receives orders. With regard to the new plant in Koh Kong, Cambodia, the tentative start-up date has been postponed to 3Q15, due to red tape.

Insurance payout underway but extra dividend is unlikely

Business Interruption claims totaling Bt1.35bn should be paid this year, but the timing and the sizes of the payouts aren't yet certain. Management guides that most of the amount will be paid in 3Q14 (it will be subject to income tax). We have yet to factor the expected payouts into our model. Despite a huge assumed gain, the firm is likely to maintain its DPS at Bt1.50-1.70/year, we believe. Note that HANA kept its DPS at Bt1.50, despite the slump in operating profit caused by the 4Q11 flooding.

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