It is now apparent to the market that the HDD industry is not performing with its outlook expected to remain sluggish for the rest of the year. Broadway's aggressive expansion plans this year appear to be ill-timed, with lots of idle capacity and massive increase in overhead expenses. Subsequently, we lower our FY12 and FY13 core PATMI estimates by 53.5% and 11.0% respectively, expecting possible 3Q losses. We believe that the consensus estimates are too optimistic and should come down drastically after the results. Downgrade to SELL, with a new TP of S$0.265 based on 0.5x FY12 P/B (-1 S.D. 5-yr historical)which the counter was trading at late last year.

Lackluster PC and HDD performance. According to Gartner, 3Q12's global PC shipment suffered a decline of 8.3% YoY as a result of macroeconomic weakness as well as continued cannibalisation by tablets. We saw Intel, IBM and Microsoft reporting results that were below market expectations. Similarly, HDD was badly hit, evidenced from Western Digital (WD)'s latest results. Global HDD shipment in 3Q12 is projected by WD to only reach 140m units, 10.8% lower than its previous July guidance. Going forward, despite the Christmas season and the launch of Windows 8, WD remains pessimistic, guiding for a flat December quarter. We argued in our previous HDD sector report that we expected the HDD demand to stay sluggish through 2012 as the impact of the new operating system would only be felt in 2013.

Aggressive capex spending may be unwise. Despite management's optimism, we have been cautious towards the group's aggressive capex of US$90m this year. It now seems to be ill-timed in view of the deteriorating outlook. We believe that the 1800 CNC machines is far from fully utilized and the large overhead cost (e.g. deprecation) is expected to hit its financial performance.

Source: OSK