Hana Microelectronics, South East Asia’s leading electronics manufacturing service (EMS) company, said that it was expecting its sales and revenues during the last quarter of 2020 and leading into 2021 to be stronger but warned that the strength of the Thai baht could have an impact on its bottom line.
Hana, which saw a decline in its quarter-on-quarter (QoQ) and year-on-year (YoY) revenues and profits, said that the rising demand for the automotive sector would help drive revenues but all this could be destabilized if the Thai baht continues to strengthen.
“We expect the automotive sector to see a recovery, but the recovery is likely to be weaker than in 2019. But what we are concerned about is the continued strengthening of the Thai baht,” Richard Han, Chief Executive Officer of Hana told Thai Enquirer.
The Thai baht has strengthened by about 4-5 per cent so far this year, prompting the Bank of Thailand to implement measures curb the baht but so far the measures have seen little success.
“There are predictions that the currency could strengthen by as much as 20 per cent, at which rate it will have a major impact on businesses,” Richard said.
But despite all this Hana has benefited from the coronavirus lockdown and the work from home (WFH) trend, but that trend is starting to weaken as the WFH is reaching a saturation point.
2020 has seen a surge in work from home trends and this has significantly increased the demand from the electronics industry and HANA has benefited from this growing trend and today stands in on a ‘solid’ base to tap the future potentials.
“The company today is on a solid standing and we need that to invest in our growth sometime next year,” Richard said.
Hana, which has six manufacturing facilities based in Thailand, China, the United States, and Cambodia and has a total floor space of over 1.1 million square feet, is also contemplating on expanding some of its existing facilities such as the one in Ayuthaya.
“In general, our operation has faced a 7 to 10 per cent drop in revenues,” said Richard. “Our business is not immune to the outbreak, but the impact is not as severe as those in the hospitality and tourism sector.”
Hana, he said, is set to benefit from the recovery of the automotive market and also the rebound seen in China, which has started to report positive economic data. China was the first country to enter the pandemic in November/December 2019 and has already started to see recovery from the economic malaise caused by the Covid-19 outbreak.
The company had seen a decrease in customers’ spending following the suspension in economic activities from the economic slowdown and the lockdown measures imposed earlier this year, Richard added.
As a result, Hana posted 320 million baht of profits in the third quarter of 2020 which is down 21 per cent year-on-year and 53 per cent quarter-on-quarter. The third-quarter outcome came out below what many analysts and the market had anticipated.
However, a research note from Bualuang Securities on Hana shows that the microelectronics facilities are considered a low-exposure group to the crisis from COVID-19 thanks to the growing work from home trend which requires more cloud and computing devices.
3Q Revenues Distribution
The total revenues of Hana in the third quarter stood at 4.8 billion baht, down 7 per cent year-on-year but up 5 per cent quarter-on-quarter. Two factories in Lamphun and Ayutthaya, accounted for the biggest sale proportion by 45 and 33 per cent, respectively.
Gross margin was 11.9 per cent, up from 11.4 per cent compared to the same period last year but down from 15.3 per cent in the second quarter.
The overseas PCBA plants in Jiaxing China represented 14 per cent of total revenues. With the recovering market in China, Hana’s factory in Jiaxing saw an increase in its sales by 5 per cent year-on-year as others were facing contraction.
Meanwhile, Hana’s factory in Ohio, USA accounting only 4 per cent of the total revenues reported a 7 per cent drop year-on-year in its operation due to the worsening number of COVID-19 cases which caused local demand to deteriorate. Hana’s Ohio operations has been one of the most impacted from the Covid-19 outbreak.
The CEO told Thai Enquirer that the trade-war between China and the US has already affected the business since before the pandemic started and so far, the market is focusing on how Joe Biden’s trading policy would change the territory.
However, the tension between the world’s superpowers also provided some advantage to Hana’s operation in Thailand by creating more jobs in domestic bases following the plants’ shutdown from the trade-war, said Richard.
So far, Hana’s employee number stood at around 9,700 from 10,500 with some layoffs in overseas facilities except in Thailand.
Brokers Revising Down
After the third-quarter financial result came out, analysts revised down the recommendation on HANA as the figure didn’t meet their estimate.
Chananthorn Pichayapanupat, an analyst at KGI Securities, downgraded HANA to Neutral, from Outperform and revised down the target price from 45 to 40 baht per share.
Another analyst at Bualuang Securities Napon Jaisan also rated ‘Sell’ on HANA with the target price of 35.50 baht per share due to its expensive valuation and because a further year-on- year earnings fall looks to be baked in for the fourth quarter.
“There is downside risk to its short-term outlook, given escalated US-China trade conflict and American government-imposed restrictions on US tech hardware exports to Huawei,’ said Napon.
According to analysts, Hana’s profitability in the fourth quarter might also be partially pressured by the strengthening of baht.
“There’s some downside risk tied to the strength of the baht – we currently assume a mean exchange rate of 31 baht per US$ for 4Q20, but the 4Q20-to-date rate is 30.9 baht per US$” Napon explained.
As a response, Richard told Thai Enquirer that the company understands the situation well and said that this is not the problem to only Hana, but most businesses are also facing setbacks from prolonged economic crisis.
However, KGI analyst expects Hana to gain a recovery in smartphone and automotive sales in the fourth quarter as they see the positive factor from the China market.
Richard said that he saw the recovery begin by around the second or third quarter of next year as the world would take a while to have a meaningful response from the COVID-19 vaccines.