Published July 9, 2009

Signs of recovery in HDD sector: CIMB

By WINSTON CHAI

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BETTER-than-expected earnings by the biggest hard drive makers could set the stage for a string of positive earnings surprises from locally listed storage component suppliers, says research firm CIMB.

The market analyst yesterday upgraded its valuation of the local hard disk drive (HDD) sector from 'underweight' to 'overweight', amid signs that the ailing industry is starting to show signs of recovering.

This sector, which relies heavily on demand for personal computers, was a major victim of the worldwide downturn as cash-strapped consumers and businesses refrained from buying notebooks and desktops. Coupled with an inventory glut, major HDD makers such as Western Digital (WD) and Seagate continually cut their earnings forecasts and axed jobs to improve their bottom lines.

'Despite the weak environment for the HDD sector in Q1 2009, the two major drive makers, Seagate and WD, still managed to deliver better-than-guided results as a result of better-than-expected unit shipments,' CIMB analyst Jonathan Ng said in a report.

With HDD players having swiftly cut production capacity to recalibrate supply and demand, the sector could exceed market expectations in Q2. 'Their pro-active moves prevented an over-supply that could prolong the downturn,' Mr Ng said.

In addition, the business outlook is looking up for the next six months. According to CIMB, most makers anticipate volume improvements in the third and fourth quarters. WD and Hitachi, for example, are targeting growth of 4-14 per cent, while Seagate is looking at only a slight contraction.

Singapore-listed HDD component suppliers such as Armstrong and Broadway are expected to benefit from their customers' comeback.

CIMB said that Armstrong's business is rebounding after a weak start this year and that Broadway - which derives more than 70 per cent of sales from the HDD sector - will be the biggest beneficiary.