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1Q utilization to fall below 50% — Merry reported Jan sales of NT$262Mn,down 31% M/M and 61% Y/Y. We note that Merry's sales drop from NT$852Min Oct, 602M in Nov, 378M in Dec and now 262M in Jan. Given plungingutilization, we think Merry's OP margin will be under tremendous pressure. Ifwe generously assume Merry's sales to rise 50% M/M in February and 20%M/M in March, Merry's 1Q consolidated sales of NT$1.13Bn would still godown by 39% QoQ and down 56% from 3Q level. Assuming 3Q utilization to be90%, Merry's 1Q utilization could be below 40%.
Rush exaggerated and unsustainable — We believe some handset OEMs wereoverly bearish when they provided 1Q09 guidance and are now raising Januaryand February orders slightly. However, this is not a reflection of overall demandbut more of an inventory replenishment for specific products in the short term.We believe supply chain companies still have poor visibility for 2Q. Moreover,despite a small order increase, we still expect most handset companies to miss1Q earnings in a meaningful way. Merry is a good example.
Consensus Merry1Q revenue is still NT$2Bn while operating profit remains 151Mn, which ismuch lower than our estimate of NT$1.1Bn and operating loss of NT$18Mn. Potential operating loss in 1Q09 — Based on our sensitivity analysis, it wouldbe difficult for Merry to avoid operating loss in 1Q. We are now projectingMerry's 1Q operating margin to be -1.6% due to plunging utilization. We alsonote that severe price pressure and potential inventory loss could also lead tomeaningful margin pressure.
Maintaining Sell rating and cutting our target price to NT$15 — We are cuttingour 2009/10 earnings by 54/32% respectively. As Merry’s revenue is likely toplunge in 1Q09 due to weak demand and price pressure, we expect itsearnings to collapse as our sensitivity analysis suggests. We maintain our Sellrating and lower our DCF target price to NT$15 from NT$41.
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