JCY International – Already driven below book value (CIMB)

Looking beyond the likely release of poor 3QFY9/11 results on 19 Aug, we upgrade JCY from Neutral to TRADING BUY as the stock is trading below its CY11 projected book value. Following the recent sharp decline in its share price along with the depressed market, we see value in the stock even though we scale back our target price from RM0.72 to RM0.58 (8x CY12 P/E) as we cut our FY11-13 EPS forecasts by 13-22% for lower gross margins from a weaker US$, higher wages and lower ASP. JCY should start to see the benefits of higher volume from WD’s merger with HGST and Seagate’s merger with Samsung in 4Q11, which should lead to a gradual improvement in earnings. This, in our view, is the main re-rating catalyst.