Venture Corporation - CIMB Research 2018-04-20: Smoke Gets In Your Eyes

VENTURE CORPORATION LIMITED V03.SI

Venture Corporation - Smoke Gets In Your Eyes

Philip Morris highlighted that its IQOS sales in Japan could be lower than its initial expectations.
Separately, the US has banned American companies from doing business with ZTE.
This affects Oclaro, a customer of Venture.
We expect q-o-q decline but y-o-y growth in profit when Venture reports 1Q18 on 25 Apr.

Philip Morris (PM US, Unrated) revealed in its 1Q18 earnings call last Thursday that its IQOS (I quit ordinary smoking) devices in Japan were selling slower than its ambitious expectations as early adopters have already been converted to this product.
Philip Morris is now trying to convert the more than 50-plus year old smokers in Japan (40% of the adult smoker population) who tend to prefer to remain status quo. At the same time, competitors have also launched their own version of IQOS.
Philip Morris commented that in Japan, IQOS sales have saturated the early adopters segment faster than it initially expected. Philip Morris believes that it still has the best product and is confident that it can convert more users to its IQOS platform though the rate of conversion could slow.

Separately, the US has banned American firms from selling parts and software to China's ZTE Corp (763 HK, Unrated) for seven years.
According to Reuters News, Oclaro (OCLR US, Unrated), a customer of Venture derived 18% of its FY17 revenue from ZTE.

According to Xiamen Intretech (002925 CH, Unrated) IPO prospectus, Venture accounted for 52.73% of its 1H17 revenue or S$278.7m on an annualised basis.
Using that as an approximation, we estimate that Philip Morris could have accounted for 7.0% or more of Venture’s FY17 turnover.
Oclaro together with Philip Morris could represent 7-10% of FY17 revenue. According to Venture’s FY17 annual report, only one customer individually accounted for more than 10% of FY17 revenue.

Venture reports 1Q18 results next Wednesday (25 Apr). The historical seasonality pattern over the past five years suggest that 1Q earnings typically account for 20% of the full year performance and q-o-q decline is typical.
For 1Q18, we expect a 34% q-o-q decline in net profit but an 80% y-o-y increase to S$87.5m still.

There is insufficient basis to slash our estimates for Venture at this juncture. Our target price remains at S$30.81, based on 17.7x FY19F earnings. However, the clouds of trade/tech war between the US and China could soften sentiment on Venture.
Re-rating catalysts are new order wins by Venture while downside risks are decline in orders from key customers.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-04-20

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