Stock Analysis Report By CIMB ~ Creative Labs Zen MP3 Players Sound Blaster Card
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Saturday, August 30, 2008

Stock Analysis Report By CIMB

A rather somber outlook for Creative and with the sub-prime crisis in USA, its not helping much either.

Company update - No creative products to show yet - by Jonathan Ng
(CREAF SP / CREA.SI, UNDERPERFORM - Maintained, S$6.10 - Tgt. S$4.55, Technology)

PDE - stiff competition from Apple and handset makers
PDE market maturing? Although Creative continues to launch new MP3 products with improved features and expanded capacity at attractive prices, it has not been able to reverse its sales downtrend for PDE products. In fact, sales of PDE products have been declining yoy for 10 quarters, after peaking in 2QFY06. We believe the reasons include:
1. Intense competition from the market leader, Apple;
2. A maturing market for MP3 players, as evident in slowing growth even for Apple. Shipment growth for iPods had tapered off to 6% yoy to 21.7m units in the first six month of 2008; and
3. We believe the standalone MP3 player market is being cannibalised by handset makers, who are increasingly incorporating MP3 features in their new handphones. Recognising the threat from handset makers, Apple introduced iPhone last year, which incorporates phone functions in the iPod player. Apple has sold more than 6m iPhones since their official launch in mid-2007.

Audio business – a sunset industry?
Audio business also going downhill. Despite efforts to introduce soundcard products aimed at the fast-growing notebook PC and outside the PC markets, turnover for this product segment has gone downhill, reflecting dwindling demand. Sales of audio products have been sliding for eight years, and contracted more than 20% yoy in the last two quarters. The fall is in line with our expectations as we earlier cautioned that award-wining products do not necessarily translate into good sales.

Speaker/headphone – the only bright spot for now
Speaker/headphone business the only bright spot. Only speaker/headphone sales grew yoy in FY08, due largely to its efforts to expand the headphone business as well as the introduction of Apple’s iPod compatible speaker systems. We believe the growth momentum is likely to decelerate as the base for its headphone business grows. Also, we see stiff competition coming from established players like Bose, JBL, and Altec Lansing.

We believe Creative is likely to have a blue Christmas this year amid slowing economies in the West, where its products mainly sell. Although the group is working very hard to reduce opex, we do not expect a return to profitability soon. Hence, we are reiterating our Underperform. Our target price of S$4.55 remains based on 0.85x CY08 P/BV, at the low end of its historical band in view of the uninspiring prospects for its underlying businesses. The only consolation is its improved balance sheet, with about US$295m net cash as at end-June, or 82% of its current market capitalisation.

Full-report including important disclosures: [ PDF ]


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