Power back on but results are mixed

US economy holds key to momentum of sharper-than-expected recovery

Soonruth Bunyamanee

The first half of this year has been the start of a comeback story for the global electronics industry. Rising local capacity utilisation rates and a sharper-than-expected pickup in sales have been cause for optimism about the electronic components sector on the SET.

Earnings performance has been mixed, however, and the companies caution that industry growth in the second half is expected to be flat or modest. Shareholder returns are also poor with a few exceptions, partly because electronics is such a capital-intensive sector.

However, most analysts are still optimistic about electronics companies and have revised upward their earnings forecasts and fair values for some of the key players in the sector.

Among the eight listed electronics companies on the Shareholder Scorecard, Draco PCB Plc, Delta Electronics Plc and Hana Microelectronics Plc have outperformed the overall market in delivering shareholder returns over a five-year investment period.

Draco PCB also led with a one-year return of 75%, followed by Delta at 35%. KR Precision Plc had the poorest performance at -47% over one year and -54% over five years.

Draco PCB, the smallest local tech firm by market capitalisation, posted the best earnings improvement, with a first-half net profit of 43.8 million baht (2.74 baht a share), compared with 19.8 million baht (1.24 baht a share) in the same period last year

The country's largest electronics manufacturer, Delta, posted a sharper-than-expected drop in net profit in the first half to 1.32 billion baht (1.11 baht a share), from 2.59 billion baht (2.21 baht a share) in the same period last year.

The company's first-half sales totalled $411 million, but its gross profit margin declined to 17.6% from 20.3% in the first half of last year.

A Delta executive said the appreciation of the baht hurt profits. In the second quarter alone, the company had a net loss on foreign exchange of 575 million baht, compared with a gain of 8.9 million a year earlier.

However, the executive predicted the company's operating performance would improve slightly for the rest of the year, with expected sales revenues of $840 million for 2002.

``Our business is likely to perform better than those of rivals because we are an original-design manufacturer and maker of tailor-made products,'' he said.

Delta is preparing to introduce a newly designed LCD monitor and projector product to tap rising demand in consumer products and automobiles. Currently, switching products account for 51% of Delta's sales, monitors 43%, with electronic components for industrial products, automobiles and telecommunications the rest.

``We expect our business to grow by 20% this year,'' the executive said.

Richard Han, chief executive of Hana Microelectronics, was more cautious, saying the industry was expected to remain stable in the second half.

Hana's first-half net profit was 247.8 million baht (1.60 baht a share), compared with 561.6 million baht (3.64 baht) in the same period last year. The company's factory is now running at 70-80% of total capacity.

A senior foreign analyst at Merrill Lynch expressed optimism about Delta and Hana, saying the brokerage had revised upward its earnings forecasts and fair values for the companies, on the back of their strong fundamentals and attractive valuations.

The brokerage revised upward its 12-month target for Delta to 42 baht. The stock closed on Wednesday at 27.50 baht. The revised target for Hana is 113 baht, compared with the closing price on Wednesday of 74 baht.

Merrill Lynch based its positive assessment of Hana on the company's decision to relocate its micro-display manufacturing facilities from the United States to its Ayutthaya factory, and on its plan to finally do something about AIT, its loss-making US subsidiary. As well, capacity utilisation rates at almost all of its plants had increased.

Delta's prospects were also good, since Dell Computer Corp, a major customer, was performing well, he said.

Another foreign analyst said the Thai electronics industry was still very dependent on the US economy, and in particular US corporations. The industry would be flat for the next six months because it did not appear that US corporations had increased their spending for infrastructure, network or computers.

``I don't think the recovery of the US economy will occur until sometime next year. Visibility is still quite poor, as many companies are being very conservative in placing orders,'' he said. _Srisamorn Phoosuphanusorn

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