ASM Pacific's net profit crashed 26% to HKD230m

Will it recover anytime soon?

According to Maybank Kim Eng, ASM Pacific's net profit amounted to HKD230m (EPS: HKD0.58), down 26% YoY and compared to net profit of HKD8 in 1Q13. Maybank's estimates were HKD326m. The variances came from the weaker-than-expected margin as ASMP reported GM/OPM of 31.5%/10.3% vs ours of 35.7%/14.1%. 

Here's more:

Quarterly consensus earnings estimates are not available but our revised forecast is 28% below Street. ASMP also incurred higher-than-expected tax rate of 25.3% vs the norm of low-20%s.

Revenue amounted to HKD2.85b, up 34% QoQ but down 3% YoY, inline with our estimate of HKD2.89b. Sales from Semi & LED up a strong 56% QoQ but still down 7% YoY which was inline with our expectations.

SMT registered a milder recovery, up 8% QoQ and 4% YoY to HKD881m.

Leadframe sales grew 32% QoQ but flat YoY to HKD478m. ASMP declared a cash dividend of HKD0.35 vs 1H12 of HKD0.60 and below our expectation of HKD0.50 – probably due to lower net cash reserved of HKD418m vs 2012 of HKD663m.  

We lowered our 2013/14 earnings forecast by 10%/5% for ASM Pacific (ASMP) to factor in a weaker-than-expected margin recovery post 2Q13 results. While

ASMP is on the way to a cyclical recovery, we see several headwinds ahead before it can achieve a structural rebound in profitability.

Pricing erosion, higher labour costs in China and escalating OPEX are likely to dampen profit margin improvement. More importantly, we believe ASMP needs a strong and sustainable topline expansion in order to achieve a mid-to-high teen margin.

While we believe it is benefiting from the recovery of the general LED lighting, the demand for chip and SMT divisions are still largely dependent on macro demands.

The recent weakness in end-markets such as PC, TV, feature phones and high-end smartphones are source of concerns. While demand for mainstream smartphones remains solid, inventory at channel is high.

The current stock valuation clearly assumes a sustainable and structural profitability recovery which differs from our assumptions. Couple with a weak ROE and the absence of a meaningful cash dividend, we maintain our Sell rating and HKD60 target price. We expect more earnings downgrade from the Street.