Monday 26 November 2012

Karin Technology

OCBC on 23 Nov 2012

We expect Karin Technology (Karin) to be a key beneficiary of recent new product launches by Apple, given the latter’s leadership position in the smartphones and tablets space. Karin has the license to sell the full range of Apple products through its In-Smart retail stores in Hong Kong, which includes the iPhone 5, iPad Mini and fourth-generation iPad. However, the limiting growth factors would be supply constraints and low margins on these products, in our opinion. Management would also strive to increase focus on higher margin network security products and enterprise software solutions to mitigate this. We maintain our HOLD rating and S$0.25 fair value estimate on Karin, still based on 6x FY13F core EPS. Prospective FY13F dividend yield remains attractive at 8.2%.

Revenue boost from new Apple product launches
Backed by its license to sell the full range of Apple products through its In-Smart retail stores in Hong Kong, we expect Karin Technology (Karin) to leverage on Apple’s leadership position in the smartphones and tablets space. Apple managed to retain its number one position for tablet shipments by capturing 50.4% of the global market share in 3QCY12, according to research firm IDC. However, this was lower than the 65.5% share in 2QCY12, which we believe signifies increasing competitive pressures and a delay in purchases in anticipation of the iPad Mini and fourth-generation iPad launch by Apple. For iPhone 5, Hong Kong, which contributed 95.5% of Karin’s FY12 topline, was one of the first Asian countries to sell the product during its worldwide launch on 21 Sep 2012. We understand that Karin is currently carrying the aforementioned products (as well as preceding versions) in its retail stores. Besides sales to locals, the Apple products are also a draw for mainland tourists because of the absence of sales tax (other than on alcohol and tobacco) in Hong Kong. However, the limiting growth factors would be supply constraints and low margins on these products, in our opinion.

Opportunities within IT Infrastructure segment
Although the expected increase in revenue contribution from Karin’s lower-margin Consumer Electronics Products segment would likely put some pressure on its gross margin, we believe that management would seek to partially mitigate this by driving higher sales from network security products and enterprise software, which carries higher margins. Research firm Gartner has forecasted worldwide spending on IT security to rise 8.4% to US$60b in 2012, with a further growth trajectory of 9.4% CAGR to US$86b from 2012 to 2016. We expect Karin to be a key beneficiary, given its strong portfolio of vendor products which addresses this space, such as Blue Coat, Check Point, F5 and McAfee. 

No changes to estimates, fair value and HOLD rating
We maintain our HOLD rating and S$0.25 fair value estimate on Karin, still based on 6x FY13F core EPS. Prospective FY13F dividend yield remains attractive at 8.2%.

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