Valuetronics (VALUE SP) - Maybank Kim Eng 2017-08-10: Getting Back Its Groove

VALUETRONICS HOLDINGS LIMITED BN2.SI

Valuetronics (VALUE SP) - Getting Back Its Groove

Valuetronics (VALUE) leverages its strong design capabilities and manufacturing flexibility to provide electronic manufacturing services (EMS) solutions for varying complexities and product mixes. In the past three quarters, revenue swung back to YoY growth from declines caused by its exit from an increasingly commoditised LED consumer-lighting space.

New products like wireless smart bulbs and growth in-vehicle wireless modules have been instrumental in its turnaround.

Management believes it has three competitive advantages over its midsized EMS peers. These are its:
1. ability to provide early-stage manufacturing advice to customers;
2. product design capabilities; and
3. flexible integration capabilities for higher-complexity, high-mix products.
VALUE tries to capitalise on its strengths by targeting products in its customers’ portfolios that are in their early life cycles. That said, customer concentration is high, with the top four accounting for c70% of its sales.

Consumer electronics (CE) accounted for c43% of its sales in FY17. Industrial and commercial electronics (ICE) made up the balance 57%.
In CE, management believes IOT lighting is still in its early growth stage worldwide and infancy in Asia.
Within ICE, it expects growth from new customers - one potentially in FY18 - and continued growth of in-car wireless connectivity / communication modules. This is an area with entry barriers from onerous certification and traceability requirements.

Management could be interested in buying new technologies and/or a manufacturing footprint outside China.

VALUE has a 30-50% payout ratio dividend policy.
VALUE trades at 11.3x consensus FY17 P/E. Based on four estimates, the street expects a 13% YoY growth in core EPS in FY18. It trades at a 28% discount to its Singapore EMS and precision engineering peers. On an ex-cash basis, VALUE trades at 6.8x forward P/E.

Valuetronics (VALUE) is an EMS provider with two production facilities in Guangdong, China.
VALUE believes its competitive advantages lie with its ability to accommodate various volumes, mixes and complexity; and its design and development capability.
For example, its EMS services range from low-volume complex industrial communications products for a leading North American enterprise to high-volume standardised premium products for global MNCs.
- CE: mostly box-build products for consumer lifestyle MNCs. A key product is wireless bulbs with IOT features, where customer is a listed Dutch MNC. Also manufactures PCBAs, including for IOT products, for a Dutch consumer electronics MNC.
- ICE: products in this segment are wide-ranging, from in-vehicle wireless communication modules to electronic thermostats, POS and teller station machines, industrial GPS, medical devices, thermal printers for industrial and commercial use etc.

Founded in 1992 with headquarters in Hong Kong. First manufacturing facility was in Danshui, Guandong, China.
In 2005, it became the preferred supplier of a Dutch-listed MNC for its lifestyle segment.
Listed on SGX Mainboard in 2007. Began construction of its Daya Bay facility, 15 mins from its Danshui facility.
Became the preferred supplier for the lighting segment of the same Dutch MNC in 2008. Began manufacturing conventional LED bulbs.
Daya Bay facility completed in 2009. Bought medical EMS business in same year.
In 2014, Valuetronics announced a 30-50% dividend pay-out policy.
Ceased to manufacture conventional LED bulbs in 3QFY16.
Began manufacturing IOT bulbs in 2QFY17.
Won a top supplier excellence award from Delphi in 2017.
Began automating certain PCBA assembly lines and semiautomation in other product lines with in-house equipment.

Growth in CE leveraged to adoption of wireless smart lighting, which is still in its infancy in Asia and early growth stage worldwide.
Growth in ICE driven by the increased use of in-vehicle connectivity modules. VALUE is currently being qualified by an end-customer of its current automotive customer, with approval expected by end-FY18.
M&A driven growth optionality with its HKD808m at endFY17.
Management apparently interested in acquiring new technologies and/or expanding capacity outside China.

ertically-integrated EMS – capabilities range from engineering to product design & development, plastic injection moulding, tool design & fabrication, metal stamping & machining, PCB & box build assembly and supply chain management.
Capabilities provide VALUE with the ability to
1. shorten time to market;
2. ensure product quality and traceability; and
3. cater to various volume, mix and complexity requirements.
VALUE trades at 11.3x FY18 consensus P/E vs 15.7x for Singapore-listed peers and 17x for MSCI Singapore Small Caps Index.
VALUE has a 30%-50% pay-out ratio dividend policy, somewhat a typical for SMID EMS firms. FY17 DPS of HKD0.20 translated to a 4.2% yield.

In CE, VALUE has customer-concentration risks for IOT lighting (a key medium term growth driver). Consumer-electronics spending is also vulnerable to economic cycles.
Automotive projects in ICE may be vulnerable to slowing car-sales growth worldwide, Brexit risks for UK-based auto manufacturing and increasing localisation in Western markets.
Pricing pressure from industry competition. CE typically faces higher pressure than ICE, with most contracts negotiated on frequent open-book pricing. ICE contracts are usually based on lump-sum pricing per product.
Currency risks. Some 90% of sales are in USD. COGS is mostly USD-linked. Labour and fixed overheads are CNY-denominated.

Neel Sinha Maybank Kim Eng | Lai Gene Lih Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-08-10

Maybank Kim Eng SGX Stock Analyst Report NOT RATED Maintain BUY 99998 Same 0.570