Seagate’s cash-and-stock offer, announced on April 19, will reduce the number of HDD makers worldwide to three. Fewer competitors typically mean higher HDD prices, which would bode well for component makers such as Broadway Industrial Group, Armstrong Industrial Corp and Beyonics Technology.
The acquisition follows Western Digital’s US$4.3-billion takeover last month of Hitachi’s HDD business, entrenching its position as the world’s market leader in the HDD space. Seagate and Toshiba, which acquired Fujitsu’s HDD business in 2009, are the remaining global players in the business.
The consolidation is expected to result in less pricing volatility and a better demand-supply environment for the HDD industry. This in turn should help shore up profitability for the sector and benefit component suppliers. HDD players like Western Digital and Seagate typically cut prices and boost capacity to gain market share, often at the expense of margins.
The agreement also gives Seagate greater access to Samsung’s NAND flash memory technology used in solid state drives (SSDs), a more-resilient storage device than HDDs. SSDs are increasingly preferred over HDDs given soaring demand for smartphones and tablet PCs, which use NAND flash memory instead of magnetic disks. Samsung is the world’s biggest maker of such memory chips. As part of the deal, Seagate will supply HDDs for Samsung’s PCs.
Suppliers to Seagate include Beyonics, Broadway, Amtek Engineering and Cheung Woh Technologies. According to CIMB’s Jonathan Ng, business for these companies may increase post-acquisition as “Samsung still sources quite a fair bit from Korean component suppliers, which may not be as cost-effective as sourcing from SGX- and KL-listed suppliers”.
The spillover effect on the local suppliers, however, will not be immediate as Seagate’s acquisition is expected to be completed only at the end of the year. In the meantime, HDD component makers still have to contend with sluggish demand for notebook PCs, a weaker greenback and rising labour and raw material costs.
Beyonics, for instance, recorded a 12.9% y-o-y fall in revenue to $346 million for the three months ended January 2011, as a result of the weaker US dollar and sharply lower selling prices and shipments to HDD customers. Sales of Singapore-listed HDD component makers are usually denominated in the greenback, resulting in lower revenue when they report results in the Singapore dollar. While Broadway’s revenue for the quarter ended December rose 6.5% to $157.7 million, net profit was flat at $10.2 million on lower contributions from the HDD and foamed plastic businesses.
If history is any guide, potential issues over Samsung’s integration with Seagate may also surface, which could mitigate or delay the benefits for the rest of the HDD industry. Seagate bought Maxtor in 2005 in a US$1.9-billion deal that created major integration problems and bogged down the company for several years.
CIMB’s Ng says while Singapore’s HDD stocks lack catalysts in the near term, investors can consider revisiting them towards the middle of the year in anticipation of a seasonally-stronger second half. Meanwhile, analysts note that the non-HDD businesses of companies like Armstrong, Broadway and Amtek are still growing and should lend some support to their share prices for the time being.
In particular, demand from the automotive sector for the services of these companies remains robust, driven in large part by booming car sales in China. Armstrong, for example, says the China market has replaced Singapore as its top revenue contributor, accounting for 32.1% of its group revenue of $225.4 million last year, up from 27.5% in 2009.
Weekend Comment Apr 21: Seagate-Samsung tie-up positive for HDD player
Thursday, 21 April 2011
Thursday, 21 April 2011
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