HDD makers relishing fat margins while suppliers struggle

Most suppliers cannot raise prices even as HDD manufacturers sell on high margins, says CIMB.

Only JCY and maybe Broadway will reap the benefits of higher average selling prices (ASPs) for HDDs, according to the brokerage firm in an advisory, which is a result of tight supply.

The big winners are the HDD sellers as they are on track to normalise production as early as 3Q12 post-Thailand floods, while still enjoying high ASPs.

Here's more from CIMB:

Almost all HDD makers reported lower shipments in the Dec quarter. We believe volume will normalise to pre-flood levels in 3Q12, at the earliest. Suppliers that are heavily dependent on WD will be hit except JCY, which is profiting from higher ASPs and greater allocation

Share prices for most HDD-related suppliers have recovered on the heels of the solid stock performances of US-listed HDD OEMs as their margins expanded. We caution that local suppliers, except JCY, will not benefit from similar margin strength. Buy only JCY and Broadway.

Worst is behind... The HDD industry shipped about 119m-120m drives in the Dec quarter (including 11m of pre-flood inventory), down from 176m in 3Q11 and 167m a year ago as the full impact of Thai floods hit home. The supply fell well below estimated demand of 170m-180m drives. WD was the worst hit with volume plunging 51% qoq to 28.5m units. This was followed by HGST (down 46% qoq), Samsung (down over 30%), Toshiba (down 15%), and Seagate (down 8%). Despite the lower volume and higher costs, margins for both Seagate and WD jumped as a result of a spike in ASP

…expect gradual recovery. Seagate and WD guided shipment of 130m-135m drives for the Mar quarter, implying 9-13% qoq growth. Yoy, this would represent a 16-19% decline. We expect the HDD industry to resume its yoy volume growth only in 4Q12. Among the two top HDD OEMs, WD expects to resume pre-flood volumes in 3Q12. Seagate, on the other hand, is in a much better shape and provided positive guidance as its facilities were not affected by the floods.

JCY the main beneficiary. JCY should book record earnings on the back of higher ASPs and allocations due to very tight supply. Suppliers like Broadway that are geared towards Seagate and HGST should similarly report a good volume recovery in 1Q12

HDD shipments to lag demand throughout 2012. Based on Seagate’s and WD’s projections, HDD shipments should continue to lag demand due to the tight supply of mechanical components and sliders. As a result, a 10% yoy contraction to 295m units is expected for 1H12 before a strong recovery of 20% yoy to 395m in 2H12 from a low base in 4Q11

Record margins for HDD OEMs on higher ASPs. Drive makers, however, are enjoying a spike in ASPs on the back of tight supply. Seagate has taken the opportunity to enter into long-term agreements with most of its OEM customers, which should help to ensure a more stable and predictable pricing environment. This should be positive for the entire HDD supply chain.

No similar fate for HDD component suppliers. Share prices of HDD component suppliers have gone up in tandem with the rallies of Seagate and WD. However, we caution that with the exception of JCY, most component suppliers have not been able to raise prices. On top of that, their volume has dwindled. As such, we expect dismal core earnings in 1H12, before a recovery in 2H12 from a low base.