Dutech Holdings Limited - CIMB Research 2016-10-05: Positive business developments brewing

Dutech Holdings Limited - CIMB Research 2016-10-05: Positive business developments brewing DUTECH HOLDINGS LIMITED CZ4.SI

Dutech Holdings Limited - Positive business developments brewing

  • We visited Dutech’s two production plants in Nantong, China and came back with a positive view. We note two positive developments that are likely ongoing.
  • We understand that Dutech is in negotiations with a reputable automotive player on a major manufacturing contract, which may materialise by end-FY16F.
  • We believe that the group is in the process of embarking on another overseas M&A.
  • Reiterate Add with unchanged TP of S$0.61, based on CY16F DCF (WACC: 13%).

Visit to Dutech’s plants in Nantong 

  • We visited Dutech’s two production plants (Tongzhou and Sutong) in Nantong, Jiangsu province, China on 22-23 Sep. Employing a total of 1,700-1,800 workers and situated on total land area of 290 mu, the two plants undertake Dutech’s key manufacturing activities in China and contributed c.60% of group revenue in FY15. 
  • We came back with a favourable view and note two positive developments for the group that are likely ongoing.

#1 Negotiations on a manufacturing contract with a new customer 

  • During our trip, we observed a new building being constructed at the Sutong plant.
  • According to local plant managers, the building was earmarked for the manufacturing of NuVinci continuously variable planetary (CVP) transmissions, an innovative transmission product, for a renowned European automotive player (a new customer). 
  • While the contract was not finalised yet at the time of our trip, management seemed confident that it would secure the contract and expected trial production to commence by end-FY16.

#2 Another overseas M&A could be on the horizon 

  • We believe Dutech is working on a potential overseas M&A. According to METRIC Mobility Solutions AG, a Frankfurt-listed intelligent terminal maker/payment solution provider (undergoing insolvency proceedings, FY15 sales: €71m, net loss: €2.9m), it had entered into a purchase and transfer agreement (contingent upon certain terms and conditions) with Dutech on 30 Sep to transfer certain operating assets and key business units to Dutech, for a consideration of a few million Euros (i.e. tens of millions in Rmb).

New developments may not be earnings-accretive immediately… 

  • While it is still too early to incorporate the possible effects of the above mentioned developments into our forecasts, we note that these developments, if confirmed, are not likely to be earnings-accretive immediately, as we believe that: 
    1. it would take 1-2 years for the new CVP transmissions plant to ramp up production and achieve breakeven, and 
    2. it may take 1-3 years for Dutech to consolidate and streamline the sales and supply channels of METRIC, in order to turn it around.

…but bode well for long-term earnings growth outlook 

  • Nevertheless, we are positive on these potential developments. 
  • Apart from organic growth via R&D, we note that management has a strong track record in M&A execution, exemplified by its past acquisitions of Format, DTMT and Krauth. These acquisitions allowed Dutech to not only expand its overseas network, but also realise significant synergies, as Dutech was able to utilise its low-cost base in Nantong to supply intermediate products to high-cost European entities.

Adopt long-term investment horizon, reiterate Add 

  • Given its sturdy net cash position of Rmb219m at end-2Q16, we think Dutech will have no difficulty in financing the potential acquisition. 
  • We believe the possible short-term pain related to these developments would be well compensated by the resulting long-term value creation. 
  • Key risks for Dutech include fluctuations in FX and steel price.

Roy CHEN CFA CIMB Research | Willam TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-10-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.61 Same 0.61