Another leg downEvent􀂃 Paragon reported a worse-than-expected 2Q08, mainly due to provisional lossesfrom Everskill (6232 TT, Not rated). We maintain our Underperform rating butreduce our TP to NT$115 from NT$127 (prior to ex-dividend value of NT$147).Impact􀂃 MACQ vs consensus. While the Street starts to lower what we see as itsaggressive forecasts, our forecast remains 25% below consensus. Thecompany could further de-rate with an expected 21% drop in 2008 profits,while ROE declined to 18% from over 30% over the past three years.􀂃 The Everskill bad debt. As Everskill’s cheque bounced in early July,Paragon was negatively impacted with AR of NT$114m. Management hasdecided to recognize it as a bad debt expense in 2Q08. Therefore, OPEXsurged to 47%.􀂃 Weak 2Q08 profit due to slower revenue and poor margin. Paragon 2Q08revenue of NT$462m, +12% QoQ/+5% YoY, was below our forecast, which wasone of the lowest on the Street. Despite 29% QoQ NB EMI shipment growth, webelieve its ASP declined 10% due to pricing pressure and product mix change.Combined with GPM erosion of 3.5ppt and a surge in OPEX, operating profitsdeclined 73% QoQ. Despite a forex gain of NT$26m, a surprisingly high tax rateof 29% resulted in 2Q08 profit NT$52m, -72% QoQ, for EPS of NT$0.66. Evenif we add back the bad debt and the 10% employee bonus, 2Q08 pretax profitsand net profits were down 10% YoY and 36%YoY, respectively.􀂃 High expectation for 3Q08. Paragon expects its revenue growth to be over 20%in 3Q08, as the company has indicated that it will reach a full utilization rate fromAugust. However, the growth is below our forecast of 29% or the Street’s over30–40% QoQ increase. We expect GPM to improve to 60%, as the benefit fromeconomies of scale is being partially offset by the continual loss at its auto-wheelrim coating division. 3Q08 profits could again see a YoY decline.􀂃 Losses at the auto-wheel rim coating division. According to management,Paragon recognized a NT$30m loss (including plant start-up fees) in 2Q08 forthe wheel coating business due to the delayed launch of its products. Thecompany expects another NT$30m loss in 2H08.
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