A large maker of hard disk drive (HDD) components, JCY International Bhd, is on a roadshow for a listing at a price-earnings ratio (PER) of between 10 and 14 times, unusually high for this industry in this part of the world.

Stocks in the industry tend to trade at PERs below 10 times, and often below five times, here and in Singapore because the profitability of HDD companies is perceived as being highly cyclical.

The offer price for JCY shares will be determined through a book-building process that had yet to commence at the time of writing, but it is widely believed the adviser, CIMB Investment Bank, will be able to secure the target price.

JCY’s prospectus is tentatively scheduled to be released later this month for a listing next month after the Chinese New Year, fund managers say.

The anticipated listing of JCY at a striking valuation stirred interest in the HDD sector on both sides of the causeway. Newsflow from the US and outperformance of the tech-heavy Nasdaq index against the broader indices also buoyed sentiment.

Hence, local tech stocks were gainers last week, dominating the major gainers list on Friday after Intel in the US reported a strong earnings rebound and record gross profit margin.

In particular, the proposed JCY listing led to strong buying interest in the stocks of other HDD players such as Notion VTech Bhd, Eng Teknologi Holdings Bhd and Dufu Technology Corp Bhd, and even Broadway Industry Group Bhd which is listed in Singapore.

That is not surprising, considering JCY is one of the world’s biggest makers of HDD components and would draw the interest of foreign fund managers for itself and to the sector.  JCY supplies more than 50% of the base plates required by Western Digital, the world’s second largest maker of HDD.

The listing of JCY offers its major shareholder Yong Yoon Kiong, better known as Y K Yong, a rich reward for his endeavour, as the initial public offering (IPO) will entirely be an offer for sale by him, and will not involve any issue of new shares by the company.

JCY would have a total market value of about RM4 billion if the IPO price is achieved at a PER of 11 times its projected earnings this year. Yong reportedly will offer 25.9% of the company’s equity for sale, and with that he will pocket a cool RM1 billion cash from the exercise, and will still own the remaining 74.1% of JCY.

The IPO will be launched at a propitious time. JCY will step out into the public space in a year of record profit, and the stock market is bullish at the time of writing.

It is understood CIMB has projected that JCY will make a net profit of about RM360 million for the year ending Dec 31, 2010, up more than 70% from last year. The IPO will be priced for its earnings that are projected to surge this year.

JCY’s earnings pattern does not appear to be highly cyclical, having maintained a high level of profits through the global crisis of 2008/09. It made a net profit RM174 million in 2007, RM203 million in 2008 and RM207 million in 2009. Most companies in other industries fared worse through the crisis.

The company’s return on equity or ROE consistently stayed above 20% between 2007 and 2009, and would leapfrog to a spectacular 40% if it achieves the projected net profit. In a survey of HDD component and personal computer component makers globally, CIMB found that JCY has the world’s highest ROE, after Ju Teng, a company listed in Hong Kong, based on their 2009 earnings. Another Malaysian company, Notion, was ranked as having the world’s third highest ROE in the industry.

The strong rebound in the electronics industry will raise the earnings of the listed tech stocks as well as that of the multinational corporations (MNCs) here. An improved performance by the electronics MNCs will be a boost for the country’s economic growth.

This article appeared in Corporate page, The Edge Malaysia, Issue 789, Jan 18-24, 2010