CONFIDENTIAL SINGLE POINT PART, PCL. (SPPT) SPPT Draft.pdf · SINGLE POINT PART, PCL. (SPPT)...

SINGLE POINT PART, PCL. (SPPT)

BangkokNovember 2005

Internal use only

CONFIDENTIAL

This report is solely for the use of Tonson Capital. No part of it may be circulated, quoted, or reproduced for distribution outside the organisation without prior written approval from Tonson Capital.

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Paul A. Renaud

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Paul A. Renaud

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Paul A. Renaud

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Paul A. Renaud

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Paul A. Renaud

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Paul A. Renaud

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Paul A. Renaud

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2

Executive Summary

Recommendation: N/A (need further analysis)

Target price: Bt 5.56 (analyst median by SETTRADE)

Supporting reasons:- HDD industry is in an early stage of long-term growth fueled by consumer electronics (CE) – mainly cell phone. The industry is expected to grow at CAGR 14% with CE grows at CAGR 54%

- Major HDD manufacturers in Thailand are expanding their production at CAGR 30%

Risks:- Its main customer; Minebea controls 71% of its sales- SPPT supplies only 8% of what Minebea needs while Minebea produce 86% by itself

- Flash drive is a substitution product for HDD which can one day replace the industry for CE

3

CONTENTS

I. General Company Basics

II. Industry

I. Supply

II. Demand

III. Technology Change

III. Performance Evaluation

4

SPPT is a manufacturer of customized precision turned parts and components of Hard Disk Drive, with a precision level lower than 5 micron

SPPT products

5

CONTENTS


II. Industry

I. Demand

II. Supply



6

HDD industry is expected to grow at CAGR 14% driven mainly by consumer electronics

HDD Units (K)

Source: Gartner, SG Cowen & Co.

Desktop

Notebook

Enterprise

ConsumerElectronics

CAGR

4%

14%

1%

54%

2004 2005F 2006F 2007F 2008F

CAGR = 14%

502,760

682,995

619,379

779,033

580,480

58% 52% 49% 45% 39%

15%

18%22%

27%

34%

7

As people lifestyle is changing, the increasing demand is becoming more diverse because of expanding applications

201520102005200019951990198519801975

Server and Storage Sub System

Desktop PC

Notebook PC

External HD

Interactive Gaming

Digital Video Recorder

Digital Audio

Digital Photography

Automotive

Digital Camcorder

Hi Definition TVs

Mobile

Client-Server applications & devices were primary demand driver for the first 25 years of HDD industry

Diverse applications and devices targeted for analog to digital richer media content experiences are the new demand driver for the next 10 years.

Source: Seagate analyst meeting

8

Product proliferation is a corner stone of this growth

Digital Imaging

GameConsole

PersonalComputer

Handheld/Portable

Automobile

HDTV with built-in DVR

Digital Video RecorderHome media server


9

The demand has created many more types of customers

Compute

• PC / Server OEM• Storage OEM• White Box Distribution Channel


Consumer Electronics

• MP3 Player OEM• DVR OEM• Digital Camera OEM• Handheld / Cell Phone OEM• Auto OEM• Retailers• Specialized Distributors

10

…who require differentiated products


3.5”Ext

3.5”Hi Cap

3.5”LC

2.5” 1.8” 1” 1”CF

0.85”

DVR / STB

Home media

Gaming

MP3

Mobile Video Player

Cell Phone

Multi function devices

Digital cameras

Digital camcorders

Auto Navigation

Auto Entertainment

Type of devise

HDD size

11

Cell phone will be the driver for consumer product

Consumer HDD Unit ForecastUnits (‘000)

2004 2005F 2006F 2007F 2008F

PVRs/DVRs

Gaming

Cell Phones

Audio/Video Player

Automotive/Other

25%

7%

287%

10%

54%

CAGR

CAGR = 54%

39,844

57,956

74,661

105,065

162,243

Market Share 2004

Market Share 2008F

33%

22%

0%

39%

6%

31%

7%

33%

19%

10%

PVR = Personal Video Recorder

DVR = Digital Video Recorder


12

…as it is adopting technology that needs storage applications

• As 3G technology, which enables higher-speed applications such as video streaming will become a driving factor in the adoption of HDDs in cell phones.

• Given the fact that these video files require large storage capacity (20GB+), HDDs are expected to become a preferred choice of storage medium in these applications.

• The adoption of Digital Video Broadcast - Handheld (DVB-H) technology in cell phones, which is expected to start in late 2006. As more consumers use cell phones to watch TV programming, additional demand for the storage of TV programming in cell phones will be generated.

Source: SG Cowen & Co.

13

The flash drive substitution fear is not likely as HDD’s cost per GB of storage for high capacity storage is cheaper than flash and it will remain so for another couple of years

HDD will maintain its significant $/GB cost advantage relative to flash, driven by the upcoming adoption of perpendicular recording technology in HDD starting in 2006, which has the potential to ultimately increase storage capacity 10-fold.

$/GB Comparison: 1-inch HDD vs Flash


HDD $/GB Advantage over Flash

Source: SG Cowen & Co

14

For applications that require a lot of storage capacity HDD will remain the preferred choice

- Greater weight - Faster read/write speed

- Lower shock resistance - Lower $/GB

- Higher power consumption - Higher capacity HDD

- Slower read/write speed - Higher shock resistance

- Lower capacity - Smaller weight and size

- Higher $/GB - Lower power consumption Flash

Cons Pros Storage Medium

Digital camerasCamera cell

phones

Digital audio playersPDAs

MP3 PlayersDigitalcamcorders

Cell phonesautomotive

PVR.s/DVR.sVideo game consolesDigital video playersHigh-end multi-media

cell phones

Low PowerConsumptionSmall weight& sizeHigher shockresistance

HighercapacityLower $/GBFasterread/writespeed

Source: SG Cowen & Co

Flash HDD

15

CONTENTS


II. Industry

I. Demand

II. Supply



16

The HDD industry has undergone a consolidation period leaving fewer participants in the supply chain

2000

Parts supplierHead Manufacturer: 8

� Merchant: 3� Captive: 5

Media Suppliers: 11� Merchant: 6� Captive: 5

Sputtering Equipment: 5Suspensions: 6

HDD manufacturersDrive Manufacturers: 9


2005

Parts supplierHead Manufacturer: 5

� Merchant: 2� Captive: 3

Media Suppliers: 8� Merchant: 4� Captive: 4

Sputtering Equipment: 2Suspensions: 3

HDD manufacturersDrive Manufacturers: 7

17

Therefore, most HDD OEMs rely on 2-3 key suppliers, and in some cases, one single source for their components

• The HDD component suppliers have similarly undergone consolidation as HDD OEMs trimmed their supplier base in a bid to secure better pricing.

• One parts manufacturer can produce many type of products offering to more than one customer. CW is an example that produces VCM plates as well as disk clamp and sells to all three of the HDD manufacturers

Source: CIMB-GK Research, Companies

*Not listed CW – Cheung Woh, CFTC – China Fine Blanking, TFS – Textron Fastening System, MCE – Metal Component

Baseplate

Disk clamp

PCBA

Plastic parts

Suspension Assy

Top cover

Fastener

VCM assy

VCM Plate

HDD Manufacturers

Parts Manufacturers

Seagate

MMI, Beyonics, Engtek

CW, Unisteel, JC Metal*

In-house, Beyonics

First Eng, Hi-P

Magnecomp, Hutchinson

Seksun, Amtek, Metalform*

Unisteel, TFS, Superway

MMI, Shinetsu

CW, CFTC*, MCE, Seksun, Amtek

WD

PCA

PCA, Unisteel, CW

Un-house, Cal-Comp

PCA, First Eng, Ming Aik

Magnecomp, Hutchinson

PCA

Unisteel, TFS

Ming Aik, Shinetsu, MQ

CW, Ming Aik

Maxtor

Brilliant, PCA

CW, JC Metal*, Min Aik

Jurong Tech, Celestica

Ming Aik, First Eng

Hutchinson

Brilliant, Metalform*

Unisteel, TFS

SAE, Summitomo, Ming Aik

CW, Ming Aik

18

Out of the seven HDD manufacturers, four of them have operations in Thailand

Seagate,

30%

WD, 17%

Hitahci, 15%

Maxtor, 14%

Toshiba, 8%

Samsung,

7%

Fujitsu, 7%

Others, 2%

Market share of HDD OEMs in 2Q05

Company with factories located in Thailand

19

Because of BOI incentives and competitive costs, Thailand is becoming the world’s largest manufacturer of HDD Drives (HDD)

• Thai Board of Investment tax incentive

• Competitive labor cost

• Competitive land price

• Competitive utility cost

American and Singaporean companies to relocate their manufacturing facilities to Thailand

Source: Royal Danish Embassy, Bangkok - Danish Trade Council

2003

54.1

130

200

HDD production in ThailandUnits (m)

Year

Market Share

Ranking

24%

2

2005-2006 2008

1

? ?

?

CAGR = 30%

20

CONTENTS


II. Industry

I. Demand

II. Supply



21

Technology is in the transition toward perpendicular recording

With longitudinal data, bit size is reduced to increase data density

As bit sizes shrink, there’s a loss in the magnetic energy that holds the bits in place. If the bit sizes become too small, the corresponding loss in magnetic energy can cause the bits to demagnetize

Perpendicular recording re-orients the bits to allow more bits per square inch without destabilization

Current Future


22

It will enhance recording capacity per hard disk at the faster rate


23

And therefore should slower the drop in price


Note: AUP = average unit price

Because of the slower drop in the price, there might be less

pressure to squeeze the suppliers

24

CONTENTS


II. Industry

I. Supply

II. Demand


III. Company Overview

25

SPPT products can be categorized into five major groups

Pivot Pivot consists of 2 cylindrical stainless parts. The outer part is called "shaft" and the inner part is called "sleeve". Both will be assembled with bearing, which is then jointed to an axis in order to move the pin to extract data from the memory media.

Spindle Motor Spindle Motor is a cylindrical aluminum die-cast assembled with other parts to produce a motor. It is driven with high speed and precise spin to make a mild noise. The spindle motor is used to move the memory media.

Fluid Dynamic BearingsFDB is a part of spindle motor in the latest version of HDD, which requires no ball bearing. FDB is the most recent technology to replace the old style of spindle motor. Therefore, this product will have a high growth in future.

Spindle motor of a 1" hard disk It is used to drive the media to read and write the information from a smallest hard disk for mass production.

Other products Other products such as shaft for motor spinning at high speed up to 12,000 RPM, automobile's power steering, parts of camera, VDO, toys, joint of optic fiber, and other made-to-order products.

Source: SPPT

26

Pivot Parts is the main product selling to HDD component producers (first tier part manufacturer)

Other Parts,

0.35%Hard Disk 1”

Parts, 0.12%

Fluid Dynamic

Bearing (FDB)

Parts, 18.21%

Pivot Parts,

62.09%

Spindle Motor

Parts, 15.65%

2004 Revenue from Selling Products(100% = Bt 441.59 m)

Most of the products produced are only in the first stage

• 80% of pivot supplying to Minebea is in the first stage of production, which is only to transform the raw material into the appropriate size in accordance with the drawings.

• The production of Spindle Motor , SPPT also supplies only the first stage of production and charge only service fee. Clients supply their own raw material.

Source: SPPT

27

..who is then send them to HDD manufacturer

Second Tier Parts Manufacturer

First Tier PartsManufacturer

Hard Disk DriveManufacturer

•SPPT•Toda Pipe• IPE•CCS

•Minebea•Nidec•JVC•Seiko

•Seagate Technology•Western Digital•Hitachi Global Storage•Fujitsu

•Thailand’s domestic value-added for hard disk drives and parts is about 37-46%.

Source: SPPT

28

SPPT largest customer is Minebea

• Minebea is the largest pivot producer and it is producing the majority of its input in-house• Minebea is SPPT’s largest customer representing 71.68% of total Sales in 3Q04• SPPT is the largest subcontractor who produces pivot for Minebea.

20%

28%12%

4%

2%3%

Pivot Market Share Minebea Pivot Part Suppliers Share

Source: SPPT

SPPT CustomerBreakdown

Minebea65%

Minebea In-House 86%

SPPT 8%

Sales to Minebea 72%

As of 3Q04

29

The company receives advance notice from customers and it could adjust its production in accordance with the demand

• The clients make an order in advance for one month and they also schedule and plan in advance for a couple of months for future order.

• SPPT setups the operating timetable for manufacturing processes to efficiently organize raw material requirement, staffs and operational machines according to the order size and timeframe.

• It allows SPPT to operate efficiently and keep inventory at the minimum level

Source: SPPT

30

The key marketing strategies of the company is emphasized on good quality and customer relationship

The company inspects all of manufacturing process under the quality control system which applies the high precision and technology equipment.

Good Quality Product

The company gets the trustworthy, good response and repeating order from the clients, who are the major manufacturer and exporter in Thailand.

The company will focus on accuracy and just-in-time delivery in order to prevent impacting on customers' assembling process. The company's policy is always to be reliable and on-time distribution.

On Time Delivery

The company assign a representative officer from each department to service and take care of the customer and product as well as to cooperate with the clients in any problem solving in order to ensure the customer's satisfaction.

Good Relationship

Source: SPPT

31

Distribution is done through customers, suppliers and exhibitions

As HDD components production requires quality, and expertise, the customers are willing to purchase from trustable and reliable subcontractors. SPPT could create good relationship with customers from trust in quality and business ethics. Minebea is serviced by the company for more than 6 years consecutively.

Customers from good

relationships

Customers from supplier's

recommendation

Trade and exhibition fairs

SPPT has a strong relationship with its suppliers and they would recommend customers to the company and both parties would get mutual benefits from the new clients.

SPPT has had opportunities to meet and contact with customers from other industries such as automobile industry from the fares organized by BOI.

Source: SPPT

32

Major cost is import raw material

• Products of the company are parts that use stainless bar and die-cast aluminum as major raw materials.

• Die-cast aluminum is provided by customers. • 80% of stainless bar and 100% of brass bar are purchased from Japan and quoted in Yen

Costs Breakdown

Source: SPPT

50% 47.31%

15%

41.27%17%

11.42%18%Others

Labor

Depreciation

Raw Material

Domestic Raw Material

Domestic Semi-ProductRaw Material

Import Raw Material

33

264303.12

619.58

758.09

400.91

30.00%29.50%30.70%31.00%29.50%

0

100

200

300

400

500

600

700

800

2002A 2003A 2004A 2005F 2006F

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Net Sales Gross Margin (%)

Revenue has been increasing every year with stable gross margin above 29%

Source: TNITY, KK, ASP

34

Net income is twice as high as its competitor therefore it can achieve high ROE

23.68%24.71%

26.56% 25.80%

13.20%11.70% 11.00%

12.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2003 2004 2005F 2006F

40.82% 41.22%43.27%

36.27%

30.20%

24.10% 23.70%27.20%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

2003 2004 2005F 2006F

Net Income ROE

SPPT Innovalues

35

And the stock is still trading below its peer

Currently Innovalues is traded at 7.9 PE05 with

the yield of 5.6%

APPENDIX

37

New BOI Incentives for HDD Industry

1. The Board announced that new HDD investment projects could locate their projects in any zone and receive the following incentives:

• All new HDD projects will receive an exemption of import duty on machinery. • The projects will also receive corporate income tax holidays, as follows:

Zone 1 — Four yearsZone 2 — Six yearsZone 3 — Eight years

2. HDD projects will also receive an additional year’s corporate income tax holiday for meeting each of the following criteria:• R&D or design expenditures of not less than 1-2 percent of annual total sales in the first 3 years• Recruitment of not less than 5 percent of total workforce within the first 3 years of S&T personnel

with a minimum of a bachelor’s degree in science, engineering or other technology,• R&D or design-related fields• Training of staff of not less than 1 percent of payroll within the first 3 years

3. HDD projects will also receive an additional two years corporate income tax holiday for meeting each of the following criteria:• Cost of developing vendors or costs of supporting related educational institutes must be not less

than 1 percent of annual total sales within the first 3 years• Set up an R&D center in Thailand within three years

Note: The total length of the corporate income tax holiday may not exceed eight years.

38

Thailand’s competitive labor cost

Source: MIGA, Benchmarking FDI Competitiveness in Asia, October 2003

39

Thailand’s competitive cost of real estate


40

Thailand’s competitive utility cost


41

China is not currently a threat to Thai HDD producers

Land Price

Ownership

Corporate Tax

Import Tax

VAT

Unskilled Labor

$30/sqm $30/sqm Same land price

Full ownership 50 year lease Thailand gives full ownership

Tax exempt for 8 yrs after BOI approval and grant electricity and plumbing deduction for 10 yrs

Tax exempt for 2 yrs and 50% for 3 yrs after

Thailand gives better tax incentive

Tax exempt for 5 yrs for export item and 75% for domestic use

Tax exempt for only export

Thailand also gives incentives for production for domestic use

7% 17% Thailand has cheaper VAT

Thailand – Zone 3 China Comment

$70/m $60/m China has cheaper labor, but there are other costs involved that makes the labor costs almost similar in the two countries

Intellectual Property Rights

More stringent law Very lax law involved Thailand handles the intellectual property rights better

Market Size Smaller Larger Though Thai market is significantly smaller, but Thailand is making a FTA agreement with China which will also give

42

Types of consumer HDDs

consumer HDDs

High-capacity applications such as PVR/DVR and gaming

High-capacity digital audio/video players and video camcorders

Mid-capacity digital audio players and, more importantly, emerging consumer storage applications such as cell phones

43

Industry Players


44

Industry players in the world

Amtek, CW, CFTC, Eng Tek, MCE, Min Aik, PCA, Seksun, TM TechVCM plate

Min Aik, MMI, MQ, SAE, Shinetsu, Sumitomo VCM assy

Amtek, Brilliant, Metalform, Miyoshi, PCA, SeksunTop cover

Hutchinson Tech, Magnecomp Precision, NHK Spring Suspension assy

MKE, Minebea, Nidec, Innovalues (subcon for Minebea), IPE (subcon for Nidec) Spindle motor

Alps, TDK/SAE Recording heads

E&E, Innovex (flex circuit), KCE, NOK (flex circuit), TopsearchPrinted Circuit Board

Central Corp, First Eng, Hi-P, Min Aik. Nypro, Tata precision Plastic parts

Minebea, MSP, Seiko, Innovalues (subcon for Minebea), IPE (subcon for Seiko, MSP) Pivot assy

Beyonics, Cal-Comp, Celestica, Venture PCBA

Fuji Electric, Hoya, Komag, Showa Denko Media

OSG, Superway, TFS, UnisteelFastener

CW, Disk Precision, Dufu, JC Metal, Min Aik, Miyoshi, PCA, UnisteelDisk clamp

Beyonics, Brilliant, Eng Tek, MMI, MKE, Nidec, PCA Baseplate

Belton, BJ Industries, Compart, Eng Tek, Xip Tech Actuator arm

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CONFIDENTIAL SINGLE POINT PART, PCL. (SPPT) SPPT Draft.pdf · SINGLE POINT PART, PCL. (SPPT)...

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