The addition of Foxconn to HP’s supplier base spells bad news to existing suppliers but it will not be a complete loss for Venture because low value consumer printers, which are non-ODM, is not a major part of HP business for Venture. In fact, in giving away non-ODM, which we estimate to be c. 10% FY09 operating profits of lesser if the relocation is phased out through FY10, Venture will see improvement in its working capital and profitability in the long run. Venture will continue to maintain a stronghold on HP’s ODM business and has seen new ODM projects from HP parked with them. We believe recent share price weakness has factored in this piece of news. We believe downside is supported by NTA of S$4.10 and 12% dividend yield. Maintain Buy with TP of S$6.

There had been rumours of HP dropping Venture from its vendor list for a couple of months now. And we have commented in email before Venture's 4Q08 results that HP was indeed consolidating vendor base. But, we believe it is unlikely that HP will drop this long-term vendor altogether. Rather, Venture could lose lower value consumer printers (non-ODM) to Foxconn but will retain ODM, which is currently the bulk of HP's business for them. Actually, Venture has been paring down non-ODM since 2006 and today, HP's business is predominantly ODM.

With respect to this impending change in HP's supply chain on Venture:

1) When it happens, we see a greater falloff on topline than bottomline as this business is largely high volume but lower value-add. Apparently, Venture has not been informed of the timeline but we believe the shift in non-ODM business would occur from Q2 onwards.

For now, our forecast is for a further 5% qoq decline in Q2 revenue after a 20% dropoff in Q1. We believe the phase out could be gradual as Foxconn would need time to build up competency. Nevertheless, there could be slight downside to our FY09 earnings forecast should the relocation to Foxconn happens much faster than expected.

2) Venture will continue to preserve their stronghold ODM business, which will benefit their working capital and profitability in the long run. In fact, our checks indicate that HP has parked new ODM projects with Venture to be rolled out in the future. Would Foxconn encroach this segment of the business too?

We believe the chances are low because Foxconn's business model is made for mass volume production. As such, configurations of its factories and production teams are also set up for mass volume manufacturing - not adaptive to the frequent line changes and more varied components management made for low volume, high mix ODM businesses. Hence, ODM may not appeal to Foxconn's model because it will take time to reconfigure production lines and retrain the mindset of sales and production personnel to undertake this form of business.

Technology wise, Venture continues to outrank its competitors with proven R&D/engineering capability. eg Venture redesigned and remade HP's mobile printer to help client reclaim leading position in mobile printer market from Canon. Today, we suspect Venture is still one of the very few, if not only, source for HP's mobile printers. In addition, Venture is a valuable partner, not just supplier. eg. Venture's self-branding printer VIPColor is selling well in the USA for SMEs. In pushing sales of these printers, Venture is also creating demand for HP's print head and ink cartridges. Hence, actually, Venture is as much a customer to HP as it is a supplier.

We acknowledged that this piece of news will affect sentiment on all HP's suppliers including Venture. However, we believe the actual impact on Venture may not be as material. Venture has never disclosed the actual % of sales from HP but we estimated it to be 23% of operating profits and these are predominantly ODM. Hence, the actual impact arising from the withdrawal of non-ODM business, could be c.10% of FY09 earnings or even less if the divestment is phased out through FY10.

Venture's share price has weakened 17% since it hit high of S$5 post Q1 results, we believe price weakness is partly due to this concern over HP's business and the magnitude of price decline would have factored in this piece of news.

Venture's book value is S$6.10 and its NTA (net of all GES' goodwill & DMX investment) is S$4.10. We believe price downside should be limited by its NTA and S$0.50 DPS, translating to12% dividend yield. Stock currently trades at 6.2x FY09 PER with net cash per share of S$0.70.

Maintain Buy with TP of S$6, 9x FY09 PER.