BROADWAY (Lim&Tan)

S$0.42-BWAY.SI

􀁺 While management had warned of a weak 2Q 2011

performance during their 1Q 2011 briefing earlier

this year, the 64% yoy and 60% qoq profit decline

to $3.7mln still came in below market expectations.

The decline would have been worse (-70%) if we exclude the forex impact.

􀁺 The worse than expected bottom-line performance reflects higher wages in China, higher raw material costs, start up costs in their new Chongqing, Chengdu and Tianjin plants.

􀁺 Due to the weaker bottom-line performance, operating cash flow halved to $15mln, not enough to cover capex payment of $38mln, requiring the company to use cash reserves and bank borrowings. Cash holdings fell from $40mln to $31mln, while borrowings rose from $55.3mln to $80.1mln. As a result, net gearing rose from 9% a quarter ago and 17% a year ago to 22% currently.

􀁺 Nevertheless, accounting for the 1 for 1 bonus issue, management maintained interim dividend payment at 1 cent a share, translating to a payout ratio of 31%.

􀁺 Assuming an unchanged final dividend of 1 cent a share (which management hopes to sustain), yield would be 4.8%.

􀁺 Looking ahead, while management expects to do better in terms of sales in 2H 2011, partly due to the passing of the negative impact from the Japanese earthquake as well as the usual seasonal pickup in orders from the electronics supply chain, the continued inflationary pressures in China as well as start up costs in their newly set up operations will continue to impact their bottom-line.

􀁺 Not helping sentiment is that its major customer Seagate plunged 17% in after hours trading last night after it forecast a significantly weaker than expected outlook going forward.

􀁺 We had turned negative on Broadway earlier this year on the back of a weak outlook provided by Broadway its peers as well as its major customers.

􀁺 While the stock has already fallen meaningfully since (20+%), we still deem it earlier days to bottom-fish as it lacks re-rating catalysts given management’s warning of an uncertain bottom-line performance going forward and its major customer’s just released profit warning. The on-going HDD industry consolidation may also provide near term uncertainties.