Guiding for lower bottomline. Cheung Woh recently announced a profit guidance for its upcoming 2HFY09 financials as it experienced a marked reduction in orders for most of its business segments. Attributed to the global economic slowdown, the company saw revenue for the 3-mth period from Nov 08 to Jan 09 decrease 37% YoY although it still expects to be profitable for FY09.

Major customers not doing well. Cheung Woh is to reduce its manufacturing working hours while senior executives would take a 15 – 25% pay cut in a bid to slash costs. Nevertheless, we caution that such measures may not provide a significant boost to the company as the macro outlook for the HDD industry is forecasted to be lacklustre in 2009 while its major customers Seagate and Western Digital are both expecting demand for HDDs to be muted for the current year.

Drop in PC shipments to affect demand for HDDs. Technology research group Gartner reported of late that the global PC industry would experience its sharpest decline in history during 2009 as the global economy continues to weaken. It is forecasting an 11.9% YoY cut in PC shipments to 257m units, although market rival IDC had struck a less bearish tone. IDC had recently announced that worldwide PC shipments had dipped 1.9% in 4Q08 and projected an 8% drop for 1H09, although it does not expect this downturn to be as bad for the PC makers as the dot-com bubble in 2001.

These developments in turn bode ill for the HDD industry, as rough estimates suggest that around 79% of HDDs are used in mobile and desktop computers.

Valuation & Recommendation. We currently do not have a rating on Cheung Woh although we will be initiating coverage on the stock. Based on consensus estimates, the company is currently trading at 3.2x FY09 P/E as compared against the industry average of 3.3x.