PP 7767/09/2010(025354)

3 May 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Upda te

3 May 2010
MARKET DATELINE

Notion Vtec Share Price

Fair Value
:
:
RM3.17
RM4.64
Rapid Expansion Ahead Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (NOTION; Code: 0083) Bloomberg: NVB MK

Net EPS Net
FYE Revenue Profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing GDY
Sep (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2009 172.6 36.0 25.6 8.5 12.0 - 2.6 8.1 24.0 0.2 1.6
2010f 227.7 56.0 36.2 41.5 9.0 34.0 2.4 6.5 30.0 0.1 2.0
2011f 295.1 71.8 46.4 28.4 7.0 43.0 1.9 5.1 30.1 0.1 2.8
2012f 384.5 98.1 63.5 36.6 5.1 54.0 1.4 3.8 32.0 0.2 3.7
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Briefing highlights – Positive revenue and earnings outlook.

Issued Capital (m shares) 154.6
Management expects revenue and profit to grow over the next two years on
Market Cap (RMm) 490.0
the back of: 1) stronger-than-expected demand for mobile computing and Daily Trading Vol (m shs) 299.5
consumer electronics; and 2) higher utilisation rate for the camera segment 52wk Price Range (RM) 3.52–0.80
as demand for SLR cameras picks up. We note that the 2QFY10 utilisation Major Shareholders: (%)
rates for HDD and the camera segments were 90% and 50% respectively. Choo Wing Hong 14.2
Choo Wing Onn 9.5
♦ HDD segment to lead growth. Given the rapid growth in demand for data Nikon 9.0
storage, Samsung is planning to ramp up its capacity for 2.5’’ HDD. Notion
thus plans to raise its own monthly unit production targets to 1m by Sep- FYE Sep FY10 FY11 FY12
EPS chg (%) - - -
10, 5m in FY11, and 7m in FY12 vs. previous targets of 3m in FY11 and 5m
Var to Cons (%) +6.5 +7.9 +17.6
in FY12. Assuming Notion hits these targets, our FY11-12 revenue estimates
could be raised by 35% and 25% p.a. respectively. PE Band Chart

♦ Capacity expansion. Management plans to spend RM120m in capex in

FY10, of which RM80m would be used to expand its 2.5” base plate capacity PER = 11x
PER = 8x
while the balance would be for capacity expansion for other product lines. PER = 5x
The capex includes the construction of a 150K sq ft plant in Klang as well as
to purchase machinery i.e. computer numerical control (CNC) and die
casting machines. Management highlighted that the company is on track to
achieve its 2.5’’ base plate capacity of 1m/month by end-2010 (vs.
350K/month currently).
Relative Performance To FBM KLCI

♦ Risks to our view. 1) Rise in prices of raw materials; and 2) Fluctuations

in the exchange rate.

♦ Forecasts. While we are positive on Notion’s long-term earnings outlook, Notion Vtec
we are maintaining our forecasts for now. Management warned that there
is some risk that capacity ramp-up and product testing costs for its 2.5”
FBM KLCI
base plate and spindle motor lines could dampen earnings in the next two
quarters. Nevertheless, longer term, we believe there is potential upside to
our FY11-12 forecasts arising from: 1) stronger-than-expected sales of
spindle motor hubs and 2.5’’ base plates; 2) stronger contribution from its
Thailand and Klang operations, capitalising on the rapid expansion of key
customers, Alphana Tech and Samsung; and 3) Higher contribution from Wong Chin Wai
the auto segment. (603) 92802158
wong.chin.wai@rhb.com.my
♦ Investment case. We maintain our indicative fair value of RM4.64 based
on a target FY09/11 PER for now although we note that after adjusting for Yap Huey Chiang
the potential dilution arising from the proposed 10% private placement and (603) 92802171)
yap.huey.chiang@rhb.com.my
1-for-5 rights issue of free warrants, our fair value would fall to RM3.87.
Nevertheless this would still imply 22.1% upside. Maintain Outperform.

Please read important disclosures at the end of this report.

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Salient points from the analysts briefing

♦ Positive revenue and earnings outlook. Management expects the strong revenue and earnings growth to be
sustained over the next two years, driven by: 1) stronger-than-expected demand for mobile computing and
consumer electronics; and 2) higher utilisation rate for the camera segment as demand for SLR cameras picks up.
We note that the 2QFY10 utilisation rates for HDD and the camera segments were 90% and 50% respectively.

♦ HDD segment to lead growth. While we had assumed that the camera segment would be the key earnings
driver going forward, the company highlighted that the potential growth in the HDD segment is likely to be
tremendous. As it stands, HDD industry is anticipating an accelerated increase in demand for data storage, as
well as advances in technology for storage density. Leaders like Seagate and Western Digital (WD) are leading
the way, but the most aggressive appears to be Samsung which is believed to be ramping up its capacity for 2.5’’
HDDs. This will likely flow down to HDD component suppliers such as Notion for its base plates and spindle motor
hubs. Therefore, Notion plans to ramp up its production targets for 2.5” base plates to 1m/month by Sep-10,
5m/month in FY11, and 7m/month in FY12 vs. previous targets of 3m in FY11 and 5m in FY12. This could
potentially raise our FY11-12 revenue estimates by 35% and 25% p.a. respectively. Management thus expects
the HDD segment to drive revenue growth, with the segment contributing 60% of total revenue in FY10. Already,
in 2QFY09/10, HDD sales grew 40% qoq.

♦ Capacity expansion. Management plans to spend RM120m in capex in FY10, of which RM80m would be used to
expand its 2.5” base plate capacity while the balance would be for capacity expansion for other product lines.
The capex includes the construction of a 150K sq ft plant in Klang as well as to purchase machinery i.e. computer
numerical control (CNC) and die casting machines. Management highlighted that the company is on track to
achieve its 2.5’’ base plate capacity of 1m/month by end-2010 (vs. 350K/month currently).

♦ Spindle motor hubs and stator assembly. We understand from management that it has obtained orders from
a new customer, Alphana Tech for its higher-value spindle motor hub component. Note Alphana Tech is one of the
world’s leading hard disk spindle motor hub manufacturer. While Notion currently only manufactures spindle
motor hubs on a smaller scale, we believe that with the introduction of Alphana Tech, Notion will commence the
production of the spindle motor in medium volume by end-2010. In addition, higher-margin spindle motor hub
will expand Notion’s operating margin.

♦ Automotive segment to be strong in FY11. Management highlighted that the automotive business is poised to
contribute significantly end-2011 with orders to roll out strongly with the release of Continental’s MK100
electronic braking system (EBS). We are positive on the developments of the new MK100 as we understand the
system is able to be incorporated into all classes of vehicles vs. previous EBS that are specific to certain vehicle
classes. This could potentially raise our revenue contribution forecast for the automotive segment by 20%.

♦ Cost-cutting measures. Following Notion’s acquisition of 60% in Autic Mekki, which will turn it into a 100%-
owned subsidiary, management highlighted that this could lead to an 8-10% reduction of nickel plating costs.
We believe this would imply a further reduction of 2% of total costs (Note that plating services currently account
for 16% of total costs).

♦ Glass substrate in the future? Western Digital (WD) recently acquired Hoya’s magnetic operations to secure
the production of glass substrates for the 2.5’’ HDD. We believe this development bodes well for Notion, and will
result in its manufacturing expertise moving up the value chain. We understand manufacturing of these glass
substrates is a step above spindle motor production. We believe Notion has the track record and the capability to
produce such components. We note that glass substrates are rapidly replacing aluminium substrates as the
former has a higher heat- and shock-resistance that are more suitable for high-density storage media.

♦ Risks and mitigating factors. We believe Notion’s risks include: 1) Rise in prices of raw materials i.e.
aluminium alloys account for 27% of total costs); and 2) Fluctuations in the exchange rate (90% of revenue is
derived in dollar). In mitigation, we note that the company is focused on: 1) cost-cutting initiatives including in-
house tooling capabilities; and 2) putting into place hedging policies to alleviate the exchange rate volatility.

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Forecasts and Recommendation

♦ Forecasts maintained, potential for upside in FY11-12. While we are positive on Notion’s long-term
earnings outlook, we are maintaining our forecasts for now. Management warned that there is some risk that
capacity ramp-up and product testing costs for its 2.5” base plate and spindle motor lines could dampen
earnings in the next two quarters. Nevertheless, longer term, we believe there is potential upside to our FY11-12
forecasts arising from: 1) stronger-than-expected sales of spindle motor hubs and 2.5’’ base plates; 2) stronger
contribution from its Thailand and Klang operations, capitalising on the rapid expansion of key customers,
Alphana Tech and Samsung; and 3) Higher contribution from the auto segment.

♦ Investment case. We maintain our indicative fair value of RM4.64 based on 10x target FY09/11 PER although
we note that there is potential 16.4% EPS dilution arising from the recently proposed 10% private placement
and the proposed rights issue of free warrants on the basis of 1-for-5. Both proposals are expected to be
completed by the end of FY09/10. Nevertheless, even after the dilution, our adjusted fair value of RM3.87 would
still imply 22.1% upside. We maintain our Outperform call on the stock.

Table 6. Earnings Forecasts Table 7. Forecast Assumptions

FYE Sep (RMm) FY09 FY10F FY11F FY12F FYE Sep FY10F FY11F FY12F
HDD 76.0 108.7 143.5 179.4 Revenue growth (%) 31.9 29.6 30.3
Camera 78.9 101.0 133.3 186.6 HDD 43.0 32.0 25.0
Others 17.7 18.0 18.3 18.5 Camera 28.0 32.0 40.0
Turnover 172.6 227.7 295.1 384.5 Auto/others 1.6 2.0 2.0

Cost of sales (112.4) (140.6) (186.4) (241.2) Gross profit margin (%) 38.3 36.8 37.3
HDD 32.0 30.0 30.0
EBITDA 64.3 91.8 113.1 148.9 Camera 46.3 45.0 45.0
EBITDA margin (%) 37.2 40.3 38.3 38.7 Auto/others 31.0 31.0 30.0

Depreciation (18.2) (22.2) (26.9) (32.7) RM:US$ exchange rate 3.30 3.25 3.20

EBIT 46.1 69.6 86.2 116.2 Source: Company data, RHBRI estimates
EBIT margin (%) 26.7 30.6 29.2 30.2

Interest income 0.2 0.4 0.9 1.5

Interest expense (3.6) (2.4) (4.9) (5.4)
Others income/exp 0.0 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0

Pretax profit 43.0 66.6 83.6 114.3

Taxation (7.0) (10.7) (13.4) (18.3)
Minority interest 0.1 0.1 0.0 0.0

Net profit 36.0 56.0 71.8 98.1

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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