Comfort in cash

TERRY WEIR

By NAREERAT WIRIYAPONG

Zero debt is the key for Hana Microelectronics to weathering the global financial and economic meltdown that is expected to put the brakes on the steady revenue and profit growth the SET-listed company has seen over the past four years.

As the world's electronics industry is being hard hit by the global slump in demand for all kinds of products, analysts have revised down their expectations for 2008 and 2009 performance for Hana and other companies.

Hana, the electronic manufacturing service (EMS) producer with facilities in Thailand, China, and the United States, reported a slight decrease of 1% on annualised revenue in the quarter to Sept 30, bringing its nine-month figure to 11.97 billion baht compared with 16.1 billion baht posted in all of 2007.

Third-quarter net profit was lower by half at 580 million baht, and nine-month income fell to 1.57 billion baht from 1.8 billion a year earlier.

The company's executives say their customers have been affected by the global recession and the electronics industry has been taking a hit across the board as a result.

"Hana's integrated circuit (IC) division will be affected in line with the industry with lower quantities of IC chips being ordered. We can expect orders to be quite soft from December 2008 and into the first half of 2009,'' said chief financial officer Terry Weir, adding that orders were expected to recover in the second half.

The PCBA (printed circuit board assembly) division is also likely to have lower demand but the impact may be less that on the IC division, he noted. "Lower demand from customers also results in greater price pressure,'' he acknowledged.

But compared to durable consumer goods such as cars or large appliances, the electronics sector is likely to be less severely affected since the applications for electronics cover a wide range of industries.

"However, the impact will be felt as electronics purchases have a large discretionary element,'' Mr Weir said.

Overall, export growth for Thailand's electronics industry is expected to be flat in 2009, against the 2008 estimate of 1.6 trillion baht.

KGI Securities forecasts Hana's revenue will be flat in 2009 with net profit of two billion baht, a sharp drop from the record of 2.45 billion posted in 2007.Globally, the US-based consultancy Gartner expects the semiconductor market will contract by 1-2% in 2009 after marginal growth of 1-2% in 2008.

"The financial crisis hit full force around the world starting in October 2008. There were already signs of a dramatic slowdown in the semiconductor assembly and test services (SATS) market,'' Gartner said, adding that the SATS industry was projected to decline 4% in 2009.

While some say this crisis is the worst the global economy has experienced in decades, Mr Weir insisted that Hana's zero debt would enable it to withstand the downturn better than its rivals. It also has one of the lowest sales and administration expense ratios in the industry.

"Companies that enter this crisis with a large amount of debt can expect great difficulties.'' he said. "For some companies the extent of the crisis may mean it is better to close now than continue on and close in a year's time.''

Nonetheless, Hana has frozen new hiring on weak demand and hinted of possible job cuts if the orders falls substantially in 2009. The group currently employs 8,000 permanent staff in Thailand and China.

Compared to what happened during the Asian financial crisis in 1997-98, Hana foresees more negative impact to be experienced by electronics manufacturers this time.

"The 1997 crisis had little negative effect on the electronics industry overall,'' said Mr Weir. "In fact, it was quite positive as it is an export industry in Asia and Hana benefited from the depreciation of the baht and demand from developed countries remained strong.''

The dot.com crisis in 2001 affected the electronics industry exclusively. It is not possible to say at this time whether the current crisis will affect the electronics industry to the same extent, he noted.

"[But] overall, I think this crisis will be less severe in Asia compared to developed countries. Asian countries have not increased debt significantly as in developed countries in recent years. To some extent it is the reverse of the Asian financial crisis in 1997.''

Therefore, the impact will be felt more on exporting companies and less on companies producing goods and services for domestic consumption.

"Hana has no debt and plenty of cash so this is a huge advantage when difficult times are ahead,'' he said.

"We will try to maintain and increase market share where possible by reducing prices where we can increase volumes of sales to customers.''

As for recommendations for other businesses to survive the crisis, Mr Weir says they should cut all unnecessary expenditure while maintaining the ability and capacity to produce quality products.

"Increasing market share for each product and customer will have to be looked at closely to see if it makes sense to do so,'' he said.

"Increasing investment in areas that were difficult, where there has been a recent shortage of skilled labour or materials, will also be beneficial for the long-term benefit of the company.''