Creative's Growth Prospects Drying Up
By Sai Man
Of DOW JONES NEWSWIRES
Tuesday February 11, 8:21 AM
SINGAPORE (Dow Jones)--Creative Technology Ltd. (CREAF), long known as one of Singapore's most innovative companies, may have run out of ideas of how to drive its sales in the years ahead, analysts say, and so now is a good time to sell its stock.
"The trouble with Creative is that it lacks a long-term growth generator," said Russell Tan, an analyst at NetResearch Asia. "It can't be milking the same sound card."
Sound cards, which give computers high-quality sound, have served Creative well since the company was launched in the late 1980s and currently account for about one-third of its total sales. In recent years, however, Creative's revenue has been in a decline, sliding 35% to US$799 million in the last fiscal year ended June 30 after a 9% fall the year before.
"My biggest concern is that revenue is on a downtrend and I can't see it turning around," said Kim Eng Ong Securities analyst Dharmo Soejanto, who has a sell recommendation on the stock.
BNP Paribas Peregrine, DBS Vickers Securities and UBS Warburg are among the others with sell-equivalent ratings on the stock. NetResearch is recommending a short-term hold.
Creative's shares, which will soon be delisted from Nasdaq, closed at S$10.90 (US$1=S$1.7523) Monday in Singapore, down more than 11% so far this year as the broader market fell just 4.3%. Some analysts say its shares are still overvalued and may be worth as little as S$8.50.
The company said it intends to delist from the U.S. market after 11 years because of the high cost of maintaining the listing.
A slowdown in the global economy, particularly in the U.S. where Creative makes about 45% of its sales, accounts in part for the steady decline in the company's revenue. By the end of the current fiscal year on June 30, its total revenue may almost have halved in just three years, according to analysts.
But more than sluggish economic conditions are to blame for the company's troubles. There are some 100 million users of Creative's well-known Sound Blaster sound card and the market is saturated. Its sound cards are found in about 70% of personal computers, according to Lim Tee Wee, an analyst at UBS Warburg.
"We believe it is a struggling giant operating in an industry at a mature phase of growth. As such, future earnings expansion is likely to languish," he said.
In the second quarter ended Dec. 31, Creative posted a net profit of US$18.9 million, down 28% on year.
Jumps Back Into Computer Graphics
Analysts say that increasingly advanced PCs with sound cards or sound chips already embedded in them will reduce demand for Creative's sound cards.
"Sound cards are only for people who are really, really serious about games, or music on their PCs," said Kim Eng's Soejanto.
Not only that, consumers seem content to stay with their older sound cards, and Creative's strategy of rolling out snazzier, more expensive versions of the product may not convince them to upgrade. Its newest sound card, the Sound Blaster Audigy 2 Platinum eX, retails for around US$270.
To be sure, Creative has tried to diversify its earnings streams. In sound, it also makes speakers, which now account for about 24% of sales. The company continues to innovate, and last year launched a computer keyboard that can double as a musical keyboard.
Creative also has jumped back into computer graphics, an arena it first entered in 1995 before losses forced it to withdraw. In May it acquired the shares it didn't already own in U.S.-based 3DLabs Inc. for US$103.7 million, hoping to repeat the success of its sound cards by bringing 3DLabs' high-end technologies to the mass market - at mass-market prices.
3DLabs has yet to turn a profit or launch a mass-market graphics product, but Chief Executive Sim Wong Hoo said last month that he expects the unit to begin making money this calendar year.
Analysts aren't so sure.
Terence Tan, an analyst at DBS Vickers, reckons it could take another three or four quarters before 3DLabs makes a significant contribution to the company.
Creative is trying to move beyond the personal computer market by making products like MP3 players and digital cameras that appeal to a broader consumer segment.
While its consumer electronics products are showing signs of growth, analysts warn that Creative is facing much fiercer competition than it ever did selling sound cards.
"Creative is really competing with the big boys out there" in the consumer market like Sony Corp. (SNE or 6758) and Samsung Electronics Co. Ltd. (Q.SSE), said one analyst. Creative doesn't have the deep pockets for marketing and advertising that these consumer electronics giants have, she said.
-By Sai Man, Dow Jones Newswires, 65-6415-4155; sai.man@dowjones.com
AI
