HANNY Magnetics (Holdings) is one of the few Hong Kong manufacturing companies with an internationally recognised brand name, yet it trades on a price-earnings multiple more suited to a third-line original equipment manufacturer (OEM). Given the present overseas interest in quality Hong Kong stocks, Hanny looks ripe for a rerating. The company was listed in December 1991 as a manufacturer of floppy disks under the Dysan brand name. The listing price was $1.20, and at yesterday's closing price of $1.69 it can hardly be said to have participated in the recent market surge. The company has faced two primary problems: anti-dumping legislation from Europe and delays in construction of new manufacturing facilities in Beijing. The former has forced it to diversify its manufacturing base away from low-cost China, while the latter has limited its ability to participate in the booming demand for 3.5-inch floppy disks. Earnings growth, however, will remain strong. In the last fiscal year ended March, the company announced net profit of $130 million, representing a 39 per cent increase in profits. Fully diluted earnings per share showed a decline, as a result of a February placement at $2.05, but it still leaves the shares on an historic price-earnings (PE) ratio of 9.9 and yield of 5.4 per cent. Given the outlook for demand for floppy disks, the company is in for another strong year. Its plant in Zhuhai is operating at full capacity, but the production facility in Beijing has finally been completed and will be fully operational by the end of the year. Anti-dumping legislation in Europe, which is being vociferously opposed, has resulted in the development of facilities in Macau, which will exclusively handle orders for the European market - although this will be at lower profit margins than low-cost China. Wardley James Capel is forecasting net profit to increase by 24 per cent in the current fiscal year, putting the shares on a prospective PE of 7.8 and an attractive yield of 6.5 per cent. While the world market for 3.5-inch disks looks to remain strong for at least the next two to three years, the group is looking at ways of diversifying its product range. Its Dysan brand name has achieved strong recognition, and it plans to use the name to move into other magnetic media, such as 8 mm cassette tapes for the increasingly popular camcorder. It has started manufacturing tapes for BASF on an OEM basis, which has proved highly profitable, and it has received an exclusive licence to manufacture and distribute BASF products in China. At present, the group has not had sufficient production to focus on the China market. However, it has signed distribution agreements with sizeable Chinese computer groups, including Stone and China Great Wall, to boost sales of its products. The Beijing factory will provide the capacity to break into the world's largest consumer market. Given its brand name, its growth track and its exceptionally low PE ratio, the shares look attractive at current levels.