Published April 27, 2009

Q1 profit warnings mostly from S-chips, electronics

Among the 21 firms affected, 15 expect losses, other six to post lower profits

By JOYCE HOOI

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WHILE the first quarter of this year was bruising for most businesses, it has drawn blood from S-chips and the electronics industry.

Bracing itself: A prime example of the quandary of overcapacity in Q1 is the electronics industry

Of the 21 companies that have issued profit warnings, the bulk are either S-chips or firms with interests in the electronics industry.

Among the 21 firms to issue profit warnings, 15 expect to post losses and the other six will report lower profits.

S-Chips, whose reputation has been badly damaged by news of accounting irregularities and breaches of loan covenants, account for 11 of the 21 firms that have braced investors for bad news.

While most S-chips have pointed the finger at lack of demand due to the economic downturn, analysts say the firms' over-reliance on global consumption landed them at a disadvantage to start with.

'Many industries, such as textiles and footwear, increased capacity massively in the years before the credit crisis on the expectation that China's export-led model would continue to drive demand for these goods,' said James Koh, an investment analyst with Kim Eng Research.

'The global economic recession has changed things suddenly and many industries now suffer from overcapacity. It is, therefore, not surprising that profits will take a beating.'

A prime example of the quandary of over-capacity in Q1 is the electronics industry.

Following what some analysts say was the worst fourth quarter in decades last year, eight of the 21 firms with profit warnings are electronics companies or firms in related industries throughout the value chain.

Valuetronics, an electronics manufacturer, and Excelpoint, an electronics component manufacturer and distributor, are preparing investors for lacklustre results.

Texchem-Pack Holdings, a firm that makes plastic packaging, has also not been spared.

With most of its clients in the electronics industry experiencing dismal sales, it will report a Q1 2009 loss greater than its RM4.5 million (S$1.87 million) net loss the quarter before.

'Q1 has been historically bad for electronics firms, but this quarter was particularly bad because when demand slowed sharply, original equipment manufacturers suddenly cut production to minimise inventory risk,' said Jonathan Ng, an analyst with CIMB-GK Research.

'This hurt their supporting component manufacturers in Singapore, some of which are running at 20-30 per cent of capacity.'

While the news may be bleak, it may not actually be news.

'If an analyst is following the company they should already have priced the global downturn into the firm's valuation,' said Lee Kok Joo, Phillip Securities' head of research.

Even if profit warnings have taken investors by surprise, there is little to glean from the explanation offered in most cases.

All 21 profit warnings cited the global downturn as a reason for poor performance.

'The global downturn is a convenient reason to use because they do not have to get into the specifics of the situation,' said an analyst with a local firm.

Firms going down the profit warning path will do so knowing that there is safety in numbers.

'This quarter is a good time to come clean, when everyone else is also doing badly,' said Mr Lee.