Short-term pain for long-term gains

HANA’s decision to write off its Bt1.95bn investment in its 43%-owned affiliate Advance Interconnected Technology (AIT) is very positive for earning prospects and sentiment towards the stock. Given that AIT has racked up losses of Bt446mn since 1Q01, investors are likely to warmly welcome HANA’s pragmatic decision not to inject further cash into this loss-making business.

Despite weak spending in the global semiconductor industry, HANA’s IC packaging business is enjoying a recovery in sales. Its main IC plant in Ayutthaya has doubled its operating profits qoq in 4Q02 and is HANA’s most profitable division. HANA’s PCB plants in Shanghai and Lamphun are performing well while its Bangkok plant and its Microdisplay unit in the US are also seeing a recovery in sales and earnings.

As a result of the AIT write-off, we expect HANA to record Bt1.1bn losses in 2002 versus our previous forecast of a Bt650mnn net profit. However, earnings are expected to rebound to Bt1.56bn in 2003. AITs’ write-off has no impact on cash flow, which is expected to reach Bt2.1bn and Bt1.1bn in 2002-2003. The company will have no problems in paying dividends or investing in new plant or machinery in the near term.

With the strong recovery in profitability this year, HANA is now trading on a PER and EV/EBITDA of 6.9X and 3.5X respectively. These are well below its historical ranges of 8-10X and 6-8X. We expect HANA to pay a dividend of Bt3 a share for its 2002 operations, representing a yield of 4%. As we are revising up HANA’s fair value from Bt85/share to Bt100, the stock offers a 43% upside.

No more losses from AIT after Bt1.95bn investment write-off

Since 1Q01 AIT’s has racked up total losses of Bt446mn. Accordingly, HANA has decided to write off its outstanding investment in AIT worth Bt1.87bn and contingent liabilities of Bt77mn in 4Q02. In addition, we are projecting AIT’s operating losses at Bt129mn in 4Q02.

Figure 1: Share of AIT losses and HANAs’ stand-alone profits

HANA’s management said that the company will no longer record AIT’s earnings results in its balance sheet starting 1Q03. HANA has rejected AIT’s proposal to raise US$13mn capital in 4Q02 and intends to dilute its stake without participating in AIT’s capital-raising. As AIT is a limited company, HANA will suffer no further losses if AIT goes bankrupt but will still own its existing shares in the company.

Improving operations at almost all plants

We believe global outsourcing is the major reason why HANA was able to record strong sales growth last year despite another weak year for the semiconductor industry. While semiconductor demand slipped 6% to US$138.6bn in 2002, expenditure in Asia grew 22% to US$50mn. This compared with declines of 14-21% yoy for expenditure in the US, Europe and Japan. Asia’s contribution of global semiconductor production has risen from 24% in January 1999 to 37% in December 2002.

HANA’s management indicated that the company has seen a strong recovery at its IC plant in Ayutthaya and Microdisplay unit in the US. The Ayutthaya plant has been running above 80% utilisation since 4Q02, driven by strong demand from wireless and small chips. The company has indicated qoq sales growth of 20% in 4Q02 and 1Q03 and forecasts a doubling of operating profits during the same period. HANA plans to move all microdisplay operations to Ayutthaya by April.

Following 25% growth in 2002, management believes revenues from the China plant will expand at a slower rate of 5-10% this year. Sales of asset control systems, which were strong last year, are expected to soften. However, the company expects large orders for mobile phone assembly in the China market by 2H03.

PCBA operations at the Lamphun plant have picked up since 3Q02 due to a change in product mix and cost-cutting. Wireless communication demand from its three main clients has been recovering and the plant is now operating around 70% of total capacity versus just 60% a year ago. Meanwhile, the company expects a better year for its Bangkok plant as its largest clients, who account for about 40% of sales, are continuing to reduce the number of vendors and giving higher-value orders to HANA.

Normalised earnings forecast to jump 59% in 2002

Excluding AIT’s losses, HANA is projected to make normalised profits of Bt1.45bn in 2002, up 59%. For 2003, we have revised up our earning forecast by 35% from Bt1.16bn to Bt1.56bn. We estimate HANA’s operating margins this year to rise from 14.4% to 17.7% given that the company will incur no losses from AIT. We also expect the company to generate net free cash flow of more than Bt3bn during 2002-2003.

Table 2: HANA’s earning revision

The company will completely write off its Bt1.95bn investment in AIT in 4Q02. This will cause HANA’s book value to decline by Bt12.5/share to an estimated Bt30. Stripping out exceptional items, HANA should record normalised profits of Bt296mn in 4Q02 versus a Bt67mn loss for the same period in 2001. Excluding AIT’s results, HANA’s stand-alone earnings are expected to grow 208% yoy in 4Q02 to Bt425mn.

Table 3 : HANA’s quarterly profit forecasts