FY09 earnings in red as global downturn hits. Willas-Array Electronics (WAE) recently posted FY09 loss amid a difficult business environment. On top of a significant 24.3% YoY (-33.6% HoH) decline in 2HFY09 sales to HK$937.8m, WAE's performance was further exacerbated by write-offs on its intangible assets (HK$8.8m) and goodwill (HK$6.7m) relating to its 60%-owned ValenceTech Limited acquisition in Sep 2006. This had subsequently dragged the group into 2HFY09 loss of HK$34.1m. For FY09, we note that WAE was also impacted by higher provisions of bad debt, forex losses, and margin erosion due to a deliberate move by management to clear excess inventory at lower prices. As such, while its FY09 revenue of HK$2.4b (-7.8%) was ahead of our sales projection of HK$2.1b, group's PATMI of HK$19.7m was closer to our estimate of HK$18.0m loss. Now in the red, WAE has skipped its dividend payout for FY09. However, this decision is highly anticipated, as cash preservation and liquidity is critical in the current operating landscape.

Continue to sharpen its operating efficiency. With the financial crisis and uncertainties revolving around the H1N1 influenza, WAE cautions that difficult times remain although it has seen some signs of a mild recovery - not sure if it was just due to inventory replenishment or a real recovery in demand. On brighter note, management is confident of weathering the downturn, given its strong financial discipline and seasoned management team. Having successfully implemented several measures, including trimming its inventory level and operating costs, minimizing its bad debts exposure, and maintaining a healthy cash position (HK$303.7m cash balance, +54.8% from a year ago), WAE said it will continue to sharpen its operating efficiency, and look out for opportunities in the PRC to extend its market presence.

Retain HOLD. While we are generally more optimistic in view of the recent improvements in WAE's customer orders and its debt ratio (net gearing fell to 0.31x from 0.63x in FY08), we note that there is still great uncertainty about the sustainability of demand, and that the group had breached one of the debt covenants after incurring loss for FY09 (to repay maximum HK$80m debt in worst case). To account for the still uncertain outlook, we pare our FY10F earnings by 32% but now use 0.4x FY10F BV (0.25x previously), in line with sector re-rating, to yield a S$0.09 fair value. We maintain our HOLD rating on WAE.