Creative Technology: Recent sell-down brings value

Creative Technology has underperformed the market since reporting a poor
set of 3Q07 results in early May, falling nearly 26% within a month to hit a
10-year low of S$6.90 on 30 May, and looks inexpensive at current levels.
With FY07F P/NTA at 1.0x and a P/E of 10.4x FY07F EPS, downside from
here is likely limited. On this ground, we are upgrading our call from Hold
to BUY, but will be lowering our fair value from S$9.90 to S$8.50, now
based on 1.2x blended FY07/08F NTA (1.4x previously), as Creative may
still be facing a long run to full recovery. There may be at least another
quarter of pain as the Apr - Jun period is traditionally a slow one for Creative
and sales typically pick up nearer the year-end holiday season. Licensing
of its X-Fi technology has been slow and disappointing but it is one area
that holds promise, especially if it can break into the consumer electronics
space.


Valuations are not demanding. Creative Technology has underperformed
the market since reporting a poor set of 3Q07 results in early May, falling
nearly 26% within a month to hit a 10-year low of S$6.90 on 30 May. And at
current levels, the valuations are not demanding, with a Price to FY07F
NTA of 1.0x and a P/E of 10.4x FY07F EPS. Hence, we believe that the
downside risk from here looks pretty limited and based on valuations, we
are upgrading our recommendation from Hold to BUY. However, Creative
may still be facing a long road to full recovery, as such, we will be lowering
our fair value from S$9.90 to S$8.50, now based on 1.2x (versus 1.4x
previously) blended FY07/FY08F blended NTA.
At least another quarter of pain. One reason for the long road to recovery
is that the Apr to Jun quarter is traditionally a slow one for Creative and with
still some restructuring to be done, we expect the company to remain in
the red. However, we may see further improvements in margins, aided by
cheap NAND flash prices. In addition, sales should start to pick up in the
Jul to Sep period going into the holiday season. Already, we are starting to
see a slew of new products from Creative, both in the MP3 player as well
as audio accessories space. And consumers, buoyed by the recent gains
from the equity markets around the world, may be in the mood to splurge
on electronic gadgets like MP3 players and related accessories.
More X-Fi deals could be the clincher. Even though Creative has launched
several X-Fi enabled products under its brand, the seemingly slow progress
made by the company in the licensing of its X-Fi technology, especially
into the consumer electronics space, has been disappointing. We think
that Creative does have a superior technology and if it can tie-up with large
consumer electronics manufacturers, licensing should provide a steady
income stream. Still on X-Fi, we understand that Creative has recently
licensed its technology to Auzentech Inc, a maker of high-end sound cards,
making it the first third-party vendor to use the X-Fi chipset on its upcoming
Auzen X-Fi Prelude. It is still early days yet but if the positive response to
the Auzen card from the online community is anything to go by, it may
cannibalize the sale of Creative's X-Fi cards. (Carey Wong)