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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.