We give Hewlett Packard’s (HPQ) 3Q09 results a closer read to gain insight on the rate of technology inventory re-stocking. These results still indicate that HPQ has an inventory-lean position. Historically, lean inventory levels tend to be supportive of fresh orders and stock prices at suppliers such as Venture Corp. Venture’s most recent 2Q09 results had four of its five revenue segments registering QoQ gains, with print and imaging the strongest at 37% QoQ (accounting for 41% of total revenues). Maintain Outperform.

Inventories lean. HPQ continues to manage inventories carefully – inventories declined 28% YoY, outstripping the 19-23% YoY decline for its three hardware divisions. Its current inventory position is lean at 21 days (25 days in 2Q09), below its usual 30+ day run rate (however, this is noisy data as we cannot strip out the impact of the EDS acquisition; Figure 4 provides a better trend line). HPQ alluded to still being short of certain laser printer models.

Strong in China; stable in the US. HPQ reported that its business in China (percentage of revenue from China was not disclosed) grew by double-digits over the prior year, above seasonality and is leading the Asia-Pacific region (which was down 4% YoY). Most importantly, the US (38% of total revenues) has now been stable for HPQ in the past two sequential quarters. HPQ expects its total revenue to rise by about 8% in 4Q09.

A better 2H09. Venture has rehired up to one-third of the positions reduced in 4Q08 and better utilisation in 2H09 will likely improve Venture’s operating profits – we expect a 50% HoH improvement in operating profits. Its S$168m in CDOs (now marked as 12% of principal value) will mature 20 December. We have assumed nothing on CDO gains/losses for 2H09. Any cash realisation from this portfolio will raise the potential of a boosted dividend for next year.
Maintain Outperform rating. Our DDM-derived target price of S$9.80 implies 2009E PER of 14x. We believe that the company's capex-light ODM model enables Venture to pay a S$0.50 dividend next year (~6% yield), with an extra bonus via a special dividend likely from a recovery of the amounts invested in the CDO.