Jurong Tech - Be Warned - Don't BUY!!- Seagate taken over Maxtor

Hard Disk Drive Sector
Seagate's suppliers to benefit from consolidation


Seagate to acquire Maxtor. Seagate and Maxtor have jointly announced
that
they entered into definitive agreement, approved by the boards of
both
companies, in which Seagate will acquire Maxtor in an
all-stock
transaction. Investors will receive 0.37 Seagate shares for each
Maxtor
share, valuing Maxtor at US$1.9b or US$7.25 per share. Thus,
Seagate's
shareholders will own 84% of the combined company upon completion of
the
merger.


Seagate estimated that the transaction is at least 10-20% accretive to
cash
EPS and will generate annual savings of US$300m in operating expenses
after
the first full year of combined operations. The combined company
will
retain the Seagate name and corporate HQ at Scotts Valley,
California.
Seagate's executive management team will continue to serve in their
current
capacities. The transaction is scheduled for completion by second
half of
2006, subject to shareholders' and regulatory approvals.


Consolidation positive for HDD industry. Seagate is the largest HDD
maker
with global market share of 28% while Maxtor is the fourth largest
with
global market share of 14%. The acquisition will further
strengthen
Seagate's positioning as leader in the HDD industry in both
breadth of
product offerings and operating scale. The acquisition will
consolidate
the HDD industry from seven major players to six. This will
eliminate a
weak player but enhances bargaining power of existing HDD
makers.
Consolidation in the HDD industry has traditionally had a positive
impact
on earnings for HDD component suppliers. For example,
consolidation of
Maxtor's supplier base after Maxtor acquired Quantum had a
significant
positive impact on Jurong Tech's earnings in FY02 and FY03.


Seagate's suppliers are key beneficiaries. We expect Seagate
to be
relentless in cost cutting to achieve cost synergies and economies of
scale
provided by the acquisition. Beneficiaries for the transaction
are
Seagate's suppliers such as Magnecomp Precision (suspension
assemblies),
Magnecomp International, MMI (base plates), Beyonics (base plates)
and
Seksun (top covers). Maxtor is the smaller entity in this transaction
and
Maxtor's suppliers are at a disadvantage when Seagate consolidates
supplier
base for the combined company. Maxtor's suppliers, such as Brilliant
(base
plates), Cheung Woh (VCMs) and Jurong Tech (PCBAs), face
uncertainties of
losing market share.


Magnecomp Precision (MPT) is prime beneficiary for the
transaction as
Seagate accounts for 70% of sales after reverse takeover of KR
Precision.
It has an entrenched position within Seagate's supply chain and
accounted
for 50-60% of Seagate's requirement for suspension assemblies. MPT is
also
ramping up production for Western Digital and Toshiba's 2.5-inch
HDD
programmes. It has commenced production of suspension assemblies
used in
1-inch HDDs for Western Digital in 4Q05. It has secured qualification
from
Toshiba for 1.8-inch HDDs and volume production will commence in 1Q06.
New
Wangnoi plant has broken even in Sep 05 and is expected to be
profitable in
4Q05 and FY06. Valuation is attractive with FY06 PE at 7.7x
(Hutchinson
Technology: 19.9x, NHK Spring: 26.8x).


Magnecomp International will benefit via 74.4% stake (after
factoring
recent placement of 177m new MPT share to institutional
shareholders) in
MPT. Its Data Storage division or MPT accounted for 57.3% of sales
and
67.4% of net profit in 3Q05. The stock trades at FY06 PE of only 5.9x.

We expect the transaction to have a negative impact on Jurong Tech's
share
price. It supplies PCBAs to Maxtor, a business that accounted for
18.3% of
sales in 3Q05. Although HDD business is not a growth driver for
Jurong
Tech, the potential loss of sales to Maxtor will make Jurong Tech
overly
reliant on Motorola. We expect some selling pressure for the stock in
the
near term.


The transaction has a neutral impact on Unisteel as it has a
diversified
customer base and supplies to both Seagate and Maxtor. Exposure to
HDD
industry has been reduced from 80% of sales to 65% following strong
growth
for fasteners used in non-HDD applications (mainly for mobile phones
and
video game consoles) and acquisition of Valen Technologies.




HDD Sector

Magnecomp Precision (MPT TB)

BUY
Current Price: Bt4.22
Target Price: Bt6.20


Magnecomp Int'l (MGCP SP)

BUY
Current Price: S$0.985
Target Price: S$1.21


Unisteel Technology (USTL SP)

BUY
Current Price: S$1.80
Target Price: S$2.28


Jurong Technology (JTL SP)

BUY
Current Price: S$1.84
Target Price: S$2.36