Memtech International (MTEC SP) - UOB Kay Hian 2017-10-11: 3Q17 Results Preview ~ To Have Performed Well

Memtech International (MTEC SP) - UOB Kay Hian 2017-10-11: 3Q17 Results Preview ~ To Have Performed Well MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International (MTEC SP) - 3Q17 Results Preview ~ To Have Performed Well

  • We expect Memtech to post a decent 3Q17 performance. 
  • We are optimistic on Memtech’s outlook with:
    1. output from China’s factories growing at the fastest pace in five years,
    2. Electric Vehicles taking centrestage as fossil fuel cars are set to be phased out, and
    3. Tesla Model 3 demand to exceed 700,000 units/year. Memtech benefits from Tesla’s production surge and positive Beats sales. 
  • Maintain BUY with a higher target price of S$1.33, pending the results release.



WHAT’S NEW


China’s factories grew at the fastest pace in five years. 

  • China’s factories cranked up output in Sep 17 to take advantage of strong demand and high prices with the official PMI at 52.4, the highest reading for manufacturing activity since Apr 12. The private Caixin PMI came in at a lower 51.0, but still indicates an overall expansion in manufacturing activity. 

EVs to take centrestage as China looks to phase out sales of fossil fuel cars.

  • Following similar announcements in France, the UK and India, China announced on 9 Sep 17 that they will set a deadline for automakers to end the sale of fossil fuel-powered vehicles. This will accelerate the push into the Electric Vehicle (EV) market, led by companies like BYD Co (whose stock price surged 40% in the month of Sep 17). 
  • We believe this will open more opportunities for downstream manufacturers of EVs like Memtech.

Model 3 demand to exceed 700,000 units/year. 

  • With the launch of the Model 3 (Tesla’s new mass market electric vehicle), CEO Elon Musk is now more confident on demand for the vehicle, with annual demand expected to exceed 700,000 units (from 500,000/year previously). 
  • The cumulative number of Model 3 reservations currently checks in at more than 500,000. Tesla is hoping to manufacture 20,000 units/month of Model 3 by end-17 and boost monthly Model 3 production to 40,000 units in 2018.


STOCK IMPACT


Memtech to benefit tremendously from Tesla’s production surge. 

  • In 2016, Tesla manufactured and delivered 76,000 vehicles. Going forward, we believe this number will surge tremendously as Tesla enters the mass market segment. 
  • We understand that Memtech is responsible for functional plastic components related to Tesla’s core batteries and even before 2H17, Tesla was already Memtech’s eighth-largest customer. With the production ramp-up of Model 3, Memtech’s 2H17 results will likely jump further.

Beats are on track. 

  • Memtech provides a number of parts for the popular Beats ear/headphones (according to the NPD Group’s Retail Tracking Service, Beats took 46 US cents of every dollar spent on wireless headphones in the US). Going forward, Gartner forecasts sales of wireless Bluetooth headsets to grow from 128.5m in 2016 to 150m in 2017, before rising to 206m by 2021. 
  • On the other end, Memtech has multiple ongoing projects with Apple but none are in mass production yet.

Once again lagging behind peers. 

  • With Memtech’s peers such as Hi-P International and Sunningdale Tech guiding for stronger 2H17 results, we remain confident on the company’s prospects going into 2H17. The market has significantly under-appreciated Memtech’s prospects as it trades at only 9.1x 2018F PE vs peers’ 11.6x 2018F PE.
  • Memtech’s net cash position equivalent to approximately 26% of its market capitalization (US$29m) is by far the highest when compared to that of peers such as Hi-P International (11%) and Sunningdale Tech (2%).


EARNINGS REVISION/RISK

  • No change to earnings forecasts.


VALUATION/RECOMMENDATION

  • Maintain BUY with a higher PE-based target price of S$1.33 (previously S$1.18) as peers have undergone another round of re-rating. Thus, we peg our valuation to peers’ average 2018F PE of 11.6x (previously 10.3x). 
  • Memtech is currently one of the few precision engineering companies trading below book at only 0.9x 2017F P/B.


SHARE PRICE CATALYST

  • Potential privatisation.
  • Expansion into new precision engineering segments.
  • Potential dividend surprises.




Nicholas Leow UOB Kay Hian | Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.33 Up 1.180



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