ECS Holdings: Likely limited impact from HP PSG spinoff (OCBC)

ECS Holdings (ECS) has released an announcement in response to HP's decision to spin off or sell its Personal Systems Group (PSG) business. This includes its PCs, notebooks and webOS operating system and devices. Given the uncertainty generated for HP's suppliers and consumers, ECS's management highlighted to us during a teleconference that HP has provided incentives for the group to entice it to continue its focus on their products. These include increased advertising and promotion and faster reimbursement of rebates. We believe that this would help to improve the working capital of ECS. Moreover, ECS has also returned all the HP tablets (TouchPad) and smartphones and received a full refund. Overall, ECS opines that the impact of a spinoff, should it materialise, is likely to mitigated as it is expected to continue to act as a regional distributor for PSG. This business contributed ~18% of ECS's total purchases (contribution has been declining) and ~8% of its total net profits. Moreover the group has also been diversifying by forging strategic agreements with other key vendors such as Dell and Lenovo. We believe that even if HP sells the PSG business to a competitor, the distributorship of the products could still continue given ECS's established relationships with most of the key vendors. Hence we maintain our BUY rating and fair value estimate of S$1.04.