MacqTech Express - Further HDD consolidation :: Macquarie Research,

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MacqTech Express
Further HDD consolidation
Event
 The Wall Street Journal reported that Samsung is in talks to sell its HDD
business potentially to Seagate. While Samsung declined to comment, our
analyst Daniel Kim thinks that the chance of a deal going through is high.
Impact
 Consolidation is generally negative for component suppliers. As we
highlighted in our recent HDD sector report, the market consolidation in HDD
is usually positive for the HDD makers as the consolidation eliminates some
capacity and prevents excessive price competition. We think the implication is
usually negative for component suppliers due to a shift in bargaining power
back to the clients in the form of price pressure. The lingering question is the
future of Toshiba’s HDD business as the HDD market might evolve to become
a duopoly between STX and WDC.
 Most negative for TDK. We estimate Samsung accounts for 25% of TDK’s
recording device business and estimate ¥20-25bn OP downside, or one-third
of estimated ¥62bn OP for FY3/12 to be at risk. Given TDK’s low valuations,
we think the downside is limited as we estimate 0.8x P/BV, or ¥3,900/share
fair value if TDK were to lose Samsung HDD head business. But if Toshiba’s
HDD business were also to be bought out, and in the world of a duopoly
between STX and WDC, we estimate TDK’s market shares might halve and
recording device OP might become zero. Under this scenario, we estimate fair
value for TDK to decline to 0.5x P/BV, or ¥2,400/share.
 Probably do not need too many motor makers. In the world of a duopoly,
we think the number of spindle motor makers may also decline from currently
four. The impact on Nidec is likely neutral as it may gain market share given
its strength but potentially could see more price pressure. We think Minebea
might risk losing out in a potential shakeout, but the share price might respond
positively if Minebea does exit the money-losing HDD motor business as this
takes out the largest uncertainty over its earnings.
 Hoya is intact. The direct impact of a Samsung HDD deal would be limited
on the glass substrate. We estimate Samsung and Seagate’s glass media are
primarily using Hoya’s disk. However, as the glass substrates market is very
consolidated having only two major players (Hoya and Konica Minolta’s share
are presumably 70% and 20%, respectively), competitiveness of Hoya is
intact.
Outlook
 Not all bad for HDD component stocks. We maintain our Outperform
rating on TDK for the time being as these are still unverified reports, but
we estimate the maximum downside risk of ¥2,400/share value if TDK
were to lose all profits from the HDD head business. We think Minebea
share price stands to gain as the stock might re-rate if it were to exit the
HDD spindle motor business.