Sunningdale Tech Ltd - CIMB Research 2016-08-03: Zhongshan restructuring completed

Sunningdale Tech Ltd - CIMB Research 2016-08-03: Zhongshan restructuring completed SUNNINGDALE TECH LTD BHQ.SI 

Sunningdale Tech Ltd - Zhongshan restructuring completed

  • We deem 1H16 core net profit was in line at 48% of our full-year forecast.
  • 2Q16 revenue was driven by automotive segment. Gross margin continued to improve qoq on the back of better product mix and cost efficiencies.
  • 2Q16 was negatively affected by one-off US$3.4m restructuring cost for Zhongshan plant.
  • Management has cautious outlook for 2H16 but expects production of automotive programmes to ramp up and for seasonally-stronger earnings to materialise in 2H.
  • Maintain Add; TP lowered for foreign currency translation loss impact on book value.

In-line 1H16 results

  • We deem 1H16 core net profit in line with expectations, at 48% of our full-year forecast. 
  • Given the weak economic conditions that we highlighted in our initiation report on 28 Mar 16, the weak sales growth of 0.8% yoy in 2Q16 and 2.5% yoy in 1H16 was unsurprising. 
  • Gross margin continued to improve from 13.3% in 4Q15 to 13.8% in 2Q16 on the back of better product mix and cost efficiencies. 
  • One-off items in 2Q16 were FX gain of US$1.1m and restructuring costs of US$3.4m.

Revenue driven by automotive segment

  • The automotive segment continued to be the only segment with strong revenue growth. 
  • 2Q16 revenue growth for this segment was 15.9% yoy, driven by increased orders from new and existing customers. In 1Q16, automotive segment revenue rose 16% yoy. 
  • In 2Q16, healthcare segment revenue increased 4.6% yoy but all other segments saw decline in revenue.

Cautious outlook

  • Management is cautiously optimistic on the second half of the year, citing cost pressures from higher wages in Asia and pricing pressure from customers. 
  • Management is also concerned about possible slowdown in automotive sales but new programmes are expected to contribute in 2H16 and act as re-rating catalysts. 
  • Overall, we expect the historical trend of stronger earnings in second half to be sustained in FY16.

Equity eroded by foreign currency translation losses

  • Based on Sunningdale Tech’s FY15 annual report, ~60% of its non-current assets (including PPE) are based in China/Hong Kong. 
  • In 1H16, the renminbi has depreciated by ~7% against the Singapore dollar. This resulted in a drastic decrease in reserves to US$12.3m at end-Jun 1. 
  • Foreign currency translation impact on overseas PPE of negative US$8.2m flowed through to the cash flow statement in 1H16.

Maintain Add

  • We adjust FY16-18F EPS by -2.4% to 0.1%, as we fine-tune our operating expense forecasts. In our view, stronger 2H16 earnings are likely to offset the uncertainties in the business environment. 
  • Zhongshan plant restructuring has been completed. 
  • Downside risks remain unfavourable exchange rates and pull-back in customers’ orders. 
  • Maintain Add but lower our target price to S$1.44, based on unchanged 0.8x (ROE:6.6%, COE:7.6%, zero growth) derived FY16 P/BV.

William Tng CFA CIMB Securities | 2016-08-03
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.44 Down 1.49