Miyoshi Precison Ltd

Major non-Seagate HDD supplier. Miyoshi Precision, a manufacturer of top covers for hard disk drive (HDD), offers an opportunity to ride the growth potential of the other OEM HDD makers, namely the Japanese makers such as Hitachi GST (HGST) and Fujitsu. Although Seagate continues to be the dominant market leader (35.3% of HDDs shipped in 2Q07), we believe there is enough growth in the industry to benefit other HDD OEMs. Both HGST and Fujitsu, which are major customers of Miyoshi, collectively commanded 25% of the HDD market in 2Q07. HDD outlook should remain buoyant. According to the latest report from IDC, the HDD industry is expected to more than quadruple by 2011 the total HDD capacity shipped in 2006 to 675m units, where revenue is expected to hit US$37b. And to cater to this growth, Miyoshi has embarked on expanding its operations in China and around Asia. Miyoshi's enlarged operations in Malaysia are already up and running, while its new China facility is expected to be fully functional by June 2008. 1H07 results suggest worst is over. Miyoshi posted a very positive set of 1H07 results ended 28 Feb, with revenue up 25.7% YoY and 19.6% HoH at S$81.7m, while net profit jumped 81.0% YoY and 61.8% HoH to S$6.8m, aided by strong demand from its Data Storage segment. Miyoshi also continued to enjoy cost savings from its Regional Business Ring Strategy, leading to further improvements in margins. In fact, net margin of 8.3% for the half, up from 6.1% in the prior half, was the best showing in 2.5 years, and we believe the soon-to-be released 2H07 results will further confirm that Miyoshi has turned the corner. Venturing beyond HDD. Going forward, Miyoshi is also branching out into other areas to tap the growing demand for metal stamping and precision engineered components. Management has identified two potential growth areas in the automotive and medical devices industry and Miyoshi has made some inroads in the automotive sector. Besides offering better margins, these new businesses will also provide some measure of stability against the more cyclical HDD business. Initiate coverage with BUY and S$0.31 fair value. Given the still buoyant HDD industry outlook and Miyoshi's strong relationship with the Japanese HDD makers, we are positive on Miyoshi and we initiate coverage with a BUY rating and a fair value estimate of S$0.31 based on undemanding 9x FY08 earnings.