Improving outlook; Upgrade to BUY. We expect Armstrong to be positively impacted by the sequential recovery for its Data Storage and Automotive businesses in 2Q09. We are also forecasting Group revenue and net profit to come in at S$36.5m and S$2.4m respectively in 2Q09, an 11% and 240% jump QoQ. Along with our upward adjustments to our earnings forecast for both FY09 (+26.3%) and FY10 (+25.9%), we upgrade Armstrong to a BUY with target price of S$0.29 (from S$0.18 previously). Our revised TP is based on 10x FY10 P/E, which is the average the stock traded at during recovery periods.

Automotive theme in China burning hot. Further boosted from the stimulus package implemented by the Chinese government in Mar 09 where it was announced that Rmb5b would be spent on rural vehicle sales subsidies, the United States was surpassed by China as the world’s biggest automotive market. In 1H09, total vehicle sales in China had increased 17.7% YoY to hit 6.1m vehicles. Market forecasts are now gunning for total sales to hit at least 12m for the whole of 2009, representing no less than a 28% increment over last year’s 9.38m vehicles. With the Automotive segment accounting for more than 25% of Armstrong’s total revenue, we believe that the company would be boosted by the growth that is expected for the automotive industry in China.

Real demand reviving after restocking in 2Q09. The restocking activity within the electronics industry that occurred in 2Q09 is an open secret with almost all of our industry contacts having experienced this phenomenon. With the hard disk drive (HDD) space expected to improve after having bottomed out in 1Q09, Armstrong’s Data Storage segment would therefore also be given a lift. Management believes that they are currently seeing genuine demand returning beyond the second quarter, with encouraging indicative orders coming through from its HDD clients. Just yesterday, Armstrong’s major customer Seagate released its 4QFY09 results that saw both top and bottomline exceed market forecasts. Seagate also noted of “signs of improved visibility” and upped its 1QFY10 sales forecast.