Tech Manufacturing Services - CGS-CIMB 2018-05-25: Clouded By Trade Tensions

Tech Manufacturing Services - CGS-CIMB 2018-05-25: Clouded By Trade Tensions Singapore Technology Manufacturing Stocks US China Trade War AEM HOLDINGS LTD SGX:AWX VALUETRONICS HOLDINGS LIMITED SGX:BN2 MEMTECH INTERNATIONAL LTD SGX:BOL VENTURE CORPORATION LIMITED SGX:V03 SUNNINGDALE TECH LTD SGX:BHQ

Tech Manufacturing Services - Clouded By Trade Tensions

  • If a trade war breaks out, tech manufacturing services companies' FY18 earnings could be negatively affected. There are signs of a slowdown in the semicon industry.
  • Our sector Overweight is based on bottom-up amalgamation of ADD calls, led by the largest market cap tech company under our coverage, Venture Corporation.
  • Despite the negative industry sentiment, Venture Corporation should be on track to deliver y-o-y growth. The question is, how much?
  • Investors are less inclined to pay premium valuations and chase share prices for tech stocks at this juncture but aim for range-bound (+/-10%) trading opportunities.
  • Sunningdale is our top pick as it is a value stock once more after poor 1Q18 results.



Held hostage to politics


Macro outlook – trade war is a risk

  • According to the International Monetary Fund (IMF) World Economic Outlook report published in April 2018, global economic growth is expected to be 3.9% in both 2018 and 2019. As for risks, concerns raised by the IMF include the erosion of support for global economic integration that could spur an inward-looking shift in policies, geopolitical strains, political discord and climate shocks.
  • IMF believes that the risks are interlinked: if one materialises, it could trigger the others. For example, a shift toward inward-looking policy approaches to cross‑border flows of goods, capital, and labour can add to geopolitical tensions and global risk aversion and non-economic shocks can weigh on short-term economic activity and on confidence in the longer-term outlook, limiting appetite for investment.
  • The resulting negative impact on growth could be severe, considering that there will be less room to cut interest rates or increase public spending to combat downturns than in the past.

Tech sector at risk

  • A Reuters article on 27 Apr 2018 highlighted that the US government may start scrutinising informal partnerships between American and Chinese companies in the field of artificial intelligence. This possible new expansion of the mandate, which will serve as a stop-gap measure until Congress imposes tighter restrictions on Chinese investments, is being pushed by members of Congress and those in US President Donald Trump's administration who worry about theft of intellectual property and technology transfer to China, according to the Reuters article.
  • The article also highlighted that other areas of interest for this new oversight could include semiconductors and autonomous vehicles. These considerations are in early stages, so it remains unclear if they will move forward and which informal corporate relationships this new initiative will scrutinise.
  • The Reuters article highlighted that if the US invokes its International Emergency Economic Powers Act, US authorities could use it to “to catch anything they want" that currently fall outside the scope of the regulatory regime.

Single-digit revenue CAGR expected for EMS industry

  • According to the Worldwide Electronics Manufacturing Service Market report published by New Venture Research in July 2017, industry revenue will grow from US$425bn in 2016 to US$551bn in 2021, a CAGR of approximately 5.3%.

Semicon industry could have hit a short-term peak

  • According to statistics compiled by the Semiconductor Industry Association, worldwide chip sales during 2017 increased about 21.6% to a record US$412.2bn from US$334.7bn in 2016. Although the chip industry’s strong growth has continued into 2018, with worldwide sales up 21.8% during the first two months of this year, the World Semiconductor Trade Statistics expects the industry’s growth to moderate to about 9.5% for 2018.
  • We note that in its recently-announced 3QFY3/18 results, Micro-Mechanics (Holdings) Ltd (SGX:5DD) commented that the group witnessed a moderation in manufacturing activity in Asia during 3Q18, which resulted in slower group sales growth of 12.9%.
  • Moving into 4Q18, MMH is watching carefully for further signs of tapering demand.

Global light vehicle sales to slow in 2018

  • According to a Jan 2018 news release by IHS Markit, total 2017 global light vehicle sales are expected to come in at around 94.5m units, a new record, up 2.4% y-o-y. After the strong performance of 2017, IHS Markit expects 2018 global light vehicle sales growth to slow to 95.9m units, up 1.5% y-o-y.
    • For the United States, IHS Markit notes that the strong fourth quarter 2017 results could impact early-2018 industry sales but full-year sales volume in 2018 is expected to achieve 16.9m units, down 1.7% y-o-y.
    • For Western Europe, IHS Markit forecasts 16.3m units of light vehicle sales for 2018, up about 0.7% y-o-y.
    • The China market is expected to record 28.1m units of light vehicle sales, up 0.2% y-o-y.
  • According to Statista, global light vehicle units sales are expected to deliver a CAGR of 2.9% over 2017-2024.


Stock Implications

  • The trade/tech war between the US and China is causing a lot of uncertainty on the ground.
  • As an example, Hi-P International Limited (SGX:H17) revised its previous bullish guidance for FY18 when the company released its 2Q18 results on 2 May 2018. On 13 Feb 2018, when the company announced 4Q17 results, the guidance for FY18 was higher profitability versus FY17. However, the guidance has now been changed to lower profitability expected for FY18 versus FY17. A key factor behind this change in guidance is the change in customers’ stance to one of cautiousness. Customers are now backing off from their previous demand requirements while suppliers are cutting prices to ensure that they get a larger share of the reduced demand.
  • On the positive side, despite all the rhetoric, China and the US have committed to averting a trade war and to focus on negotiations instead.

AEM HOLDINGS LTD (SGX:AWX)  AEM Holdings (SGX:AWX) Share Price  AEM Holdings (SGX:AWX) Target Price  AEM Holdings (SGX:AWX) Analyst Reports  AEM Holdings (SGX:AWX) Corporate Actions  AEM Holdings (SGX:AWX) Announcements  AEM Holdings (SGX:AWX) Latest News  AEM Holdings (SGX:AWX) Blog Articles

  • AEM Holdings’s 1Q18 core net profit at 18% of our full-year forecast was below expectations. The results came in lower than our expectations due mainly to the higher operating expenses arising from its three recent acquisitions. Assuming a 17% corporate tax rate, 1Q18 core net profit formed 24% of AEM’s FY18 guidance (pre-tax profit of at least S$42m).
  • Given that AEM is still the sole supplier to its major customer, the key risks going into the rest of FY18 are order delays or reduced orders from its major customer. AEM has commented that based on its own observations, its major customer is likely to have satisfied its requirements for new machines and, going forward, less predictable replacement demand (for customer’s legacy machines) will kick in.
  • On a positive note, there remains room for AEM to raise its FY18 pre-tax profit guidance of at least S$42m as the visibility for the fourth quarter is limited. We believe AEM will have better visibility on the outlook for 4Q18 when it announces second-quarter results sometime in Aug 2018. AEM will also launch its own Test Handler product and hopes to announce customer wins in the 2H18/FY19 time frame.
  • The impact of a trade war on AEM is hard to quantify. If we apply a 25% and 50% haircut to our earnings forecast for FY19 and maintain our target P/E of 10x, the revised down target prices will be S$0.905 and S$1.36, respectively. Our current scenario is a Target Price of S$1.78 based on P/E of 10x (17% discount to sector average) FY19 earnings.

MEMTECH INTERNATIONAL LTD (SGX:BOL)  Memtech International (SGX:BOL) Share Price  Memtech International (SGX:BOL) Target Price  Memtech International (SGX:BOL) Analyst Reports  Memtech International (SGX:BOL) Corporate Actions  Memtech International (SGX:BOL) Announcements  Memtech International (SGX:BOL) Latest News  Memtech International (SGX:BOL) Blog Articles

  • Memtech’s 1Q18 core net profit of US$1.8m was within our/consensus expectations as it was a seasonally weaker quarter, coupled with resource allocation for mass production in 2H18. Apart from growing automotive sales from both new and existing customers, we expect consumer electronics sales to ramp up in 2H, resulting in FY18F EPS growth of 14%. 
  • Maintain ADD on the stock with S$1.47 Target Price, based on 10x FY19F P/E and supported by 4% dividend yield. It currently trades at 8.4x FY19F P/E, which is below its 10-year historical average of 12x and the industry mean of 10x.

SUNNINGDALE TECH LTD (SGX:BHQ)  Sunningdale Tech (SGX:BHQ) Share Price  Sunningdale Tech (SGX:BHQ) Target Price  Sunningdale Tech (SGX:BHQ) Analyst Reports  Sunningdale Tech (SGX:BHQ) Corporate Actions  Sunningdale Tech (SGX:BHQ) Announcements  Sunningdale Tech (SGX:BHQ) Latest News  Sunningdale Tech (SGX:BHQ) Blog Articles

  • Sunningdale’s 1Q18 core net profit was below expectations due to the 12.2% y-o-y decline in the consumer/IT business segment. As utilisation rates fell, 1Q18 gross profit margin also fell to 12.7%. In addition, it reported an exchange loss of S$5.2m. These three factors led to a 25.4% share price collapse two days after the results were announced. We opine that Sunningdale needs to better manage its foreign exchange risk, which tends to be quite substantial.
  • In terms of outlook, management expects quarter-on-quarter growth to resume and the consumer/IT segment is expected to see growth again as the production of new products for customers ramps up.
  • Sunningdale’s 10-year historical average forward P/BV is 0.55x (the average historical P/BV during the GFC was 0.51x). Based on our FY18 BVPS of S$2.03, a de-rating back to the 10-year historical average P/BV will result in a Target Price of S$1.12 or 13.8% downside from the current price. Our base-case valuation for Sunningdale is S$2.50 based on a target FY18F P/BV multiple of 1.23x. We expect Sunningdale to remain profitable in FY18.

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)  Valuetronics (SGX:BN2) Share Price  Valuetronics (SGX:BN2) Target Price  Valuetronics (SGX:BN2) Analyst Reports  Valuetronics (SGX:BN2) Corporate Actions  Valuetronics (SGX:BN2) Announcements  Valuetronics (SGX:BN2) Latest News  Valuetronics (SGX:BN2) Blog Articles

  • We expect Valuetronics to report 4QFY18F core net profit of HK$45m-50m, implying 10-22% y-o-y growth, as we think a stronger ICE performance could mitigate any sales slowdown from its major CE customer. 
  • At its current valuation of 8.7x FY3/19F P/E (5.4x ex-cash), we see limited downside as compared to the peers' average of 10x and its historical average P/E of 5.4x (+1 s.d. at 7.8x). The stock offers close to 5% dividend yield, with potential catalysts from new customer wins and a higher-than-expected dividend payout. 
  • Downside risks are unexpected order delays or cancellation.

VENTURE CORPORATION LIMITED (SGX:V03)  Venture Corp (SGX:V03) Share Price  Venture Corp (SGX:V03) Target Price  Venture Corp (SGX:V03) Analyst Reports  Venture Corp (SGX:V03) Corporate Actions  Venture Corp (SGX:V03) Announcements  Venture Corp (SGX:V03) Latest News  Venture Corp (SGX:V03) Blog Articles

  • Although Venture’s 1Q18 core net profit at 19.1% of our full-year forecast was in line with the 5-year historical average of 19.3%, the share price suffered a massive de-rating due to concerns over the weak 1.5% y-o-y revenue growth reported for 1Q18 as well as customer concentration risk.
  • We believe Venture is still on track for y-o-y net profit growth, barring a full-blown trade war between the USA and China. Venture has plans to engage more US customers with the recent purchase of an 182,405 square feet industrial building in the US. The company remains in a net cash position.
  • Our current base-case scenario values Venture at 15.4x (11-year average) FY19 earnings as concerns over the trade war lead to a multiple de-rating. We note that during the GFC, Venture’s traded at a historical average forward P/E of 14.7x. 
  • Venture has started its share buy-back, purchasing 109,000 shares at an average cost of S$20.72 on 7 May 2018. It continues to buy back shares.







William TNG CFA CGS-CIMB | https://research.itradecimb.com/ 2018-05-25
SGX Stock Analyst Report ADD Maintain ADD 1.72 Down 1.81
ADD Maintain ADD 1.100 Same 1.100
ADD Maintain ADD 1.470 Same 1.470
ADD Maintain ADD 25.640 Same 25.640
ADD Maintain ADD 2.500 Same 2.500



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