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.

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.

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.

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.

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.

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 | http://research.itradecimb.com/ 2016-08-03

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.44 Down 1.49