Memtech International - OCBC Investment 2016-06-01: Strong April Automotive Growth in China, US, EU

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MEMTECH INTERNATIONAL LTD M26.SI 

MEMTECH INTL - STRONG APRIL AUTOMOTIVE GROWTH IN CHINA, US, EU

• Outlook positive for automotive segment
• Tesla’s 500K production target
• Trading at 4.5% FY16 yield

Automotive sales continue expansion in China, US, Europe

• Automotive sales had a strong showing in April. China passenger vehicle sales rose 6.5% YoY in April to 1.78m, according to the China Association of Automobile Manufacturers. This comes on the tail of nearly 10% YoY growth in March. 
• Given that the tax break policy expires at the end of this year, we are wary of the potential for a YoY drop in automotive sales for 2017. 
• According to Autodata Corp, US new car and light-truck sales hit 1.5m vehicles in April, a 3.6% YoY increase for a seasonally adjusted annualized pace of 17.4m. This contrasts with the 16.6m annual pace for March. 
• According to the European Automobile Manufacturers Association, European Union new car sales rose 9.1% in April to 1.3m units. Over a four month period, passenger car registrations were up 8.5%.

Tesla’s plans to expand production to 500K in 2018

• Last month, Tesla announced that it will sell around US$1.4bn in stock to fund an expansion that includes Model 3 and increasing annual production to 500,000 vehicles in 2018. Should Tesla be able achieve its aggressive sales target with Memtech continuing as the sole supplier for the parts it currently supplies, the production of 500K could potentially contribute around US$15m of revenue. 
• Nonetheless, the contribution from Tesla is likely to be modest for FY16, with Tesla’s production targets at 80K to 90K for 2016.

Continued concern with CE slowdown

• Despite positive indications from the various automotive markets, we continue to be concerned with the potential for further delays in customer electronics orders. It was revealed at the 1Q16 briefing that a major customer had delayed a project amidst pressure to cut supplier prices across the board. 
• Our projected YoY growth for the automotive, telecommunications, consumer electronics, and industrial & medical segments are 11.5%, -5.4%, -4.9%, and -13.0% respectively. As of yesterday’s closing price of S$0.665, Memtech is currently trading at 4.5% FY16 yield and 5.0% FY17 yield. 
• Maintain HOLD with an unchanged fair value of S$0.680.

Deborah Ong OCBC Securities | http://www.ocbcresearch.com/ 2016-06-01

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.680 Same 0.680