Fu Yu Corp - CIMB Research 2016-09-21: Integrated precision injection provider

Fu Yu Corp - CIMB Research 2016-09-21: Integrated precision injection provider FU YU CORPORATION LTD F13.SI

Fu Yu Corp - Integrated precision injection provider

  • One-stop solutions provider of precision injection moulds and plastic parts.
  • Management sees potential growth in medical, automotive and solar segments, and possible reversal of revenue decline from FY17 onwards.
  • Gross margin expansion from FY11’s 7.1% to 16.7% in 1H16 could be sustained via various initiatives, according to management.
  • Cash-generative business; 1st DPS of 1.5Scts in FY15 translates into 7.9% yield.
  • Trades at 9.5x FY16 P/E (peers’ average: 9.7x), based on Bloomberg consensus.



Background 


One-stop precision injection and plastic solutions provider 

  • Established in 1978 and listed since 1995, Fu Yu is one of the largest manufacturers and suppliers of high precision injection moulds and plastic parts in Asia, with 10 manufacturing plants across Singapore (3), Malaysia (2) and China (5). 
  • It offers the entire value chain of services, from design and fabrication, to assembly and secondary processes such as surface treatment and ultrasonic welding. 
  • The overall utilisation level is estimated to be 50-60%, with potential for further expansion, according to management.

Wide customer base across various industries 

  • Fu Yu serves customers from diverse industries, including information technology, telecommunications, automotive, medical, electronic and electrical appliance and water filtration in home appliance sectors. 
  • The company works with both direct customers (MNCs) and leading contract manufacturers such as Venture (VMS SP, Hold) and Jabil. Our channel checks reveal that some of its existing clients include HP, Philips, Bosch and Verifone.

Competitors 

  • Among the SGX-listed, smaller cap players in the precision manufacturing space, some of the companies that are similar to Fu Yu are Sunningdale Tech (SUNN SP, Add), Fischer Tech (FISC SP, Not Rated) and Memtech International (MTEC SP, Add). All four companies have overlapping operating segments, such as automotive, consumer electronics, medical/healthcare and telecommunications/networking. 
  • According to management, Fu Yu does not directly compete with large-cap contract manufacturers like Venture and Flextronics as it stands to benefit from some of their outsourced work.


Financials 


Management expects sales weakness to reverse 

  • The downward trend of topline numbers over the past few years was not a pretty sight, which could be attributed to 
    1. intensifying competition in the industry, and 
    2. more selective onboarding of projects with better margins.
  • Revenue from China and Malaysia has fallen continually, but slightly mitigated by better sales performance in Singapore boosted by green and medical products, according to management. 
  • Management expects stable sales from consumer electronics, network communications and printers, as well as growing demand from medical, automotive, and green (air, water, solar) segments, to potentially reverse the sales decline in the near-to-medium term.

Improving margins and profitability 

  • Gross margins have, on the other hand, seen significant improvement from 7.1% in FY11 to 15.9% in FY15 (1H16: 16.7%), as a result of increased penetration in segments (e.g. medical, automotive) and projects that yield higher margins. Other contributing factors include 
    1. increased streamlining of operations, 
    2. some fully-depreciated PPE in FY15, and 
    3. appreciation of US dollar against local operating currencies (ringgit, Singapore dollar, renminbi), given that 80-90% of revenue is denominated in US dollar, vs. 50-60% of costs in US dollar terms.
  • Consequently, we saw Fu Yu turning around from core net loss-making to profitability in FY14 (1H16 core net profit of S$6.2m, up from S$5.4m in 1H15).
  • Management believes this earnings momentum could continue despite persistent downward price pressure, as the company targets to sustain margin expansion via strategic shift towards higher margin products, cost-tightening and higher value-added initiatives.

Cash-generative business with little capex needs 

  • Similar to most tech manufacturing companies, Fu Yu has a cash-generative business with S$20m-30m net cash generated from operating activities every year in FY13-15. 
  • Its cash conversion cycle averages 30-40 days, as compared to Sunningdale Tech’s 70-80 days and Memtech’s 90-100 days. 
  • Management expects its annual capex needs to remain in the range of S$5m-10m (1H16: S$3.6m), mainly for maintenance and replacement, i.e. for newer machines.

War chest of cash to support dividends 

  • With cash holdings of c.S$97m and zero debt as at end Jun-16, management believes Fu Yu has sufficient financial strength to maintain its dividend policy of at least 50% of PATMI (recently implemented in FY16) and make strategic investments, even after allocating 30-50% of it for working capital purposes.
  • We note that the company paid its first DPS of 1.5Scts in FY15, translating into 7.9% dividend yield and payout ratio of 80.3%. Based on the last traded price of S$0.19, the company has a net cash/share of S$0.13 as of end Jun-16, representing c.68% of its market capitalisation.


Valuation 


Historical valuations on par with industry peers 

  • Fu Yu trades at a 12 month historical P/E of 10.2x, higher than industry average of 6.1x. In terms of FY15 P/BV and ROE, the company is also more expensive at 0.84x and 6.7%, vs. peer average of 0.64x and 11.4%. 
  • All Singapore-listed peers are in net cash positions, with Fu Yu offering the highest FY15 dividend yield of 7.9% (average of 4.7%). 
  • Based on Bloomberg estimates, it now trades at 9.5x FY16 P/E, broadly in line with SGX-listed peers’ average of 9.7x.


Risks 


Unexpected order pushback or cancellation 

  • Fu Yu operates in a highly competitive environment, where pricing pressure is often only compensated by higher sales volume. Any unexpected delay or cancellation of orders may not only cause companies to suffer from revenue drop, but also lower profitability due to erosion of economies of scale. 
  • We note that the largest customer concentration risk lies in the printers segment at 20- 30% of total sales.

Unfavourable US dollar depreciation 

  • We understand that 80-90% of the company’s revenue is denominated in US dollar, while only 50% of costs are in US dollar. 
  • As Fu Yu does not adopt a hedging policy, any sudden weakening of the US dollar vs. the local operating currencies (Singapore dollar, ringgit and renminbi) will have an adverse impact on both the gross margin level and profitability.




NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-09-21
CIMB Research SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998



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