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UBS Investment Research
Asia Tech
Alpha Preferences
Add Compal to our Least Preferred List to replace Quanta
We are adding Compal to our Least Preferred list. Arthur Hsieh and Patrick Chen
downgraded Compal to Sell from Neutral. Key negative catalysts are (1) exposure
to Acer (c. 40% of Compal's notebook shipments) in light of its negative preannouncement;
(2) weight on margins of diversification efforts towards tablet PCs
(c. 20% of R&D effort) which may not yield significant revenues (key customers
are Acer and Lenovo); (3) exposure to Japan for TV shipments (50% of total); (4)
some disruption on power management IC sourcing side (Texas Instruments). We
are removing Quanta post recent share price decline
Remain cautious on Asia Tech:
We have been cautious on the sector since January 10th. Asia Tech has
underperformed Asia MSCI by 5% since late January, which is a decent correction,
but not sharp enoguh for us to ignore fundamental risks. The sector remains valued
at 14.1 '11E PE with downside risks prevailing on EPS due to PC demand, margins
pressure, and uncertainty over Japan. Supply-driven sectors such as LCD and
Memory are exception as for both, supply / demand is improving into 2Q.
Affirm O/W Wireless, LCD and Memory
Most Preferred: Catcher, HTC, Lenovo, LGD, Samsung and TPK. Least Preferred:
ASMPT, FIH, HCL, LG Innotek, SPIL and now Compal.
Least Preferred
HCL Technologies (HCLT.BO)
Sell
For HCL margins remains disappointing. Despite inline revenue growth in 2FQ11 (backed by
IT services vol. growth of 6.7% QoQ), EBITDA margin remained at 16.3% lower than
expectation, 2FQ11 IT services (72% of revs.) EBITDA margin declined 40bp QoQ. Also,
attrition remained relatively high with the segment losing 2,055 employees during the quarter.
Gross addition of employees declined to the lowest in the past 4 Qtrs. Vs. INFY & TCS
where it remained relatively firm; We believe this implies 3FQ11 volume growth could be
slower than 2FQ11.
HCL currently trading at 18% PE discount to Infosys, lower than 25% avg. over the past 3
years. We expect this to widen due to growing margin differential between HCL and
INFY/TCS, without revenue growth outperformance
— Valuation: We have a DCF-based price target of Rs425.
— Risk: A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Tech
Alpha Preferences
Add Compal to our Least Preferred List to replace Quanta
We are adding Compal to our Least Preferred list. Arthur Hsieh and Patrick Chen
downgraded Compal to Sell from Neutral. Key negative catalysts are (1) exposure
to Acer (c. 40% of Compal's notebook shipments) in light of its negative preannouncement;
(2) weight on margins of diversification efforts towards tablet PCs
(c. 20% of R&D effort) which may not yield significant revenues (key customers
are Acer and Lenovo); (3) exposure to Japan for TV shipments (50% of total); (4)
some disruption on power management IC sourcing side (Texas Instruments). We
are removing Quanta post recent share price decline
Remain cautious on Asia Tech:
We have been cautious on the sector since January 10th. Asia Tech has
underperformed Asia MSCI by 5% since late January, which is a decent correction,
but not sharp enoguh for us to ignore fundamental risks. The sector remains valued
at 14.1 '11E PE with downside risks prevailing on EPS due to PC demand, margins
pressure, and uncertainty over Japan. Supply-driven sectors such as LCD and
Memory are exception as for both, supply / demand is improving into 2Q.
Affirm O/W Wireless, LCD and Memory
Most Preferred: Catcher, HTC, Lenovo, LGD, Samsung and TPK. Least Preferred:
ASMPT, FIH, HCL, LG Innotek, SPIL and now Compal.
Least Preferred
HCL Technologies (HCLT.BO)
Sell
For HCL margins remains disappointing. Despite inline revenue growth in 2FQ11 (backed by
IT services vol. growth of 6.7% QoQ), EBITDA margin remained at 16.3% lower than
expectation, 2FQ11 IT services (72% of revs.) EBITDA margin declined 40bp QoQ. Also,
attrition remained relatively high with the segment losing 2,055 employees during the quarter.
Gross addition of employees declined to the lowest in the past 4 Qtrs. Vs. INFY & TCS
where it remained relatively firm; We believe this implies 3FQ11 volume growth could be
slower than 2FQ11.
HCL currently trading at 18% PE discount to Infosys, lower than 25% avg. over the past 3
years. We expect this to widen due to growing margin differential between HCL and
INFY/TCS, without revenue growth outperformance
— Valuation: We have a DCF-based price target of Rs425.
— Risk: A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
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