Trek 2000: Bright future in a dim market (DMG)

(BUY, S$0.30, TP S$0.45)

This recent series of highly positive events underline the bright future of Trek. We continue to favour the counter due to 1) boost in licensing income due to legal settlements, 2) wide adoption of the iSDIO card (Trek’s modified FluCard®) as it has become the industry standard and 3) iSDIO card’s potential to expand beyond the camera market. Reiterate BUY recommendation with an unchanged TP of S$0.45 based on 7x FY12P/E.

Million dollar settlement on ThumbDrive® sets a positive precedent. Trek has reached an out-of-court settlement with Verbatim, which Trek filed a complaint against for the alleged infringement of its USB-flash drive patents. We believe that Trek will receive a licensing fees ranging between 2% and 3% based on Verbatim’s USB-flash drive sales figure, translating to an additional profit of US$1m yearly (33% of FY10 earnings). Following this precedent, we expect the rest of the alleged companies (Imation Corp, IronKey, Kingston Technology, Patriot Memory, RITEK Corp and Advanced Media) to follow suit.

Officially the industry standard; Toshiba and Panasonic embrace. The worldwide SD Association announced that the iSDIO card to be the standard for all future Wi-Fi memory cards. The iSDIO card is the creation of a partnership between Trek and two major industry players, Panasonic and Toshiba. We have seen adoption commence with the first batch of 100,000 iSDIO cards shipped to Toshiba (known as the Toshiba FlashAir WiFi SD Card). Currently, the SD card market is estimated to worth US$2b with Toshiba being the largest producer.

Expanding beyond cameras. iSDIO card’s potential to expand beyond the camera industry has seen through the recent inking of a contract between Trek and PLUS Corporation (second largest electronic whiteboard producer in the world). Effective from FY12, Trek will deliver approximately 50,000 units to PLUS. On top of that, discussions are currently in place as Panasonic expresses strong interest in the expansion of the usage of the iSDIO card in its office automation and consumer electronics businesses.