Valuetronics - RHB Invest 2017-06-22: Takeaways From Trip To China Factories

VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics - Takeaways From Trip To China Factories

We recently visited Valuetronics’ factories in China. There, we took note of the encouraging signs of improvement in its activity, as well as in its automated and semi-automated processes. New machines for an additional line for its automotive segment have also arrived.
It is on the lookout for M&A targets, either vertically downstream or horizontal businesses that fit and synergise with its existing units.

As we lift our FY18F NPAT forecasts by 5%, our DCF-backed Target Price rises to SGD0.85 (from SGD0.81, 7% upside, 10x FY18F P/E).
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Its CE segment has ramped up strongly in FY17, due to the introduction of a new smart lighting WiFi lightbulb, launched in 2Q17 by a customer.
We expect the ramp-up to continue, but at a slower pace of 11-14% in FY18F. We also estimate CE margins to narrow in FY18F, due to the cost-down element of these projects. We do, however, expect Valuetronics to try to improve the yield rate of its projects, and as well as upgrade processes with automation.
We note that it has improved automation at its factories to minimise the drop in margins.

There are a few potential new projects in the pipeline in Valuetronics’ industrial and commercial electronics (ICE) segment. We saw new machines that will be used for a new manufacturing line, created for a new product to be manufactured by its automotive segment. It will also launch a new product for the temperature sensing field, and simultaneously develop a new product with an existing customer.
All in all, we expect its ICE segment to grow at 10-12% for FY18F. However, we do expect a slight drop in margins, compared to FY17F levels.

The lease for Valuetronics’ old factory in Dan Shui, China (which is mainly involved with its CE division) is expiring in 2020.
Management believes the likelihood of the lease being renewed is low, due to major residential property projects being developed in the area. Management has also begun planning for the factory’s possible relocation. We expect this to incur capex of at least HKD100m, coupled with a 3-year period to relocate and set up the facility, if this happens.

With a cash pile of HKD752.9m, management will be looking to utilise the majority of it for M&As. Targets would be companies that are in the vertical downstream or horizontal businesses that fit and synergise with its existing business, which now has much stronger fundamentals.

We came away more encouraged by its efforts to improve automation and increase yield and margins, as well as ramp up activity for its factories. As a result, we lift our FY18F NPAT by 5%. This also boosts our DCF-backed TP to SGD0.85.
Our TP is also pegged to a 10x FY18F P/E.
In the meantime, investors can hold on to the stock for Valuetronics' attractive dividend ratio of around 5%.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-06-22

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