Fu Yu Corp - CGS-CIMB Research 2018-09-27: Returning Excess Cash

FU YU CORPORATION LTD (SGX:F13) | SGinvestors.io FU YU CORPORATION LTD SGX:F13

Fu Yu Corp - Returning Excess Cash

  • Fu Yu Corp Ltd is a one-stop plastic components supplier with more than 40 years’ experience.
  • Fu Yu has been back in the black since FY13 thanks to its restructuring efforts. It resumed dividend payments in FY15.
  • We initiate coverage on Fu Yu with a HOLD for its FY18-20F dividend yield of 9.3%, as we await improvement in its ROEs from further restructuring.



Company Background


One-stop plastic components supplier

  • Fu Yu Corp Ltd (Fu Yu) provides vertically-integrated services for the manufacture of precision plastic components and the fabrication of precision moulds and dies. Since its inception in 1978, the group has grown to become one of the largest manufacturers of high precision plastic parts and moulds in Asia.
  • Fu Yu has established a strong medical and automotive sectors.
~ SGinvestors.io ~ Where SG investors share
  • To enhance its value-add services to customers and build , as well as sub-assembly.
  • Fu Yu was listed on the Main Board of the Singapore Exchange (SGX) on 14 Jun 1995. ~ S G investors . io ~ Where SG investors share

Segmental revenue

  • In terms of Fu Yu’s FY17 revenue breakdown, the three largest segments are printing and imaging (31% of revenue), consumer electronics (20%) and networking and communications (18%).
  • Based on the geographical source of revenue (location of its factories), China accounted for 60.6% of FY17 revenue, Singapore comprised 21.0% and Malaysia contributed the remaining 18.4%.

Right sizing the company

  • Fu Yu’s revenue has been impairment of production equipment and factory closure costs in China.


Outlook

  • Fu Yu intends to continue raising the level of automation and improve its manufacturing processes for greater efficiency and precision. The group also plans to explore other steps to streamline its organisational structure.
  • Fu Yu aims to advance its business development efforts in a bid to expand its market share with existing customers and make inroads with prospective customers. To this end, Fu Yu plans to work closely with existing customers to support their introduction of new products and actively pursue opportunities with new customers to build its project pipeline.
  • Fu Yu’s target segments are 3D printers, security-related, medical, automotive and environmentally-friendly products. At this juncture, the group stated that it has not seen any financial impact from the ongoing trade war between the US and China. ~ S G investors . io.


Valuation and Recommendation


Share price downside offset by dividend yield

  • We initiate coverage on Fu Yu with a HOLD rating and target price of S$0.17, based on 0.8x forward P/BV (+1 s.d. above its historical 10-year average) applied to our FY18F BVPS estimate of S$0.177. ~ Where SG investors share.

Is our target 0.8x forward P/BV a reasonable valuation basis for Fu Yu at this juncture?

  • We believe it is because it is close to the implied P/BV derived from the ROE-g/COE-g model. (See Figure 13 in the PDF report attached)
  • Relative to its local peers, Fu Yu is currently trading at 0.80x FY18F P/BV (vs. sector average of 0.75x) and FY19F P/E of 12.6x (sector average of 9.2x). Based on our estimates, Fu Yu’s FY18F ROE is the lowest among its local peers but its dividend yield of 9.3% is the highest.

The next question that springs to mind is what is depressing Fu Yu’s ROE?

  • We think the answer is the low-margin nature of its precision plastic components business (price-competitive industry), excess capacity (resulting from loss of customers) and excess cash (low returns).
  • To spark share price re-rating above book value parity, we think Fu Yu needs to:
    1. Improve cost efficiencies via automation;
    2. Find new customers to improve factory utilisation (Fu Yu guided that the average utilisation rate for its factories is around 60% in 1H18);
    3. Decide on the future of its China plants that are not profitable (as a whole, its China operations are profitable but some plants are loss making and Fu Yu has excess capacity in China);
    4. Return excess cash.
  • We note that Fu Yu has China operations.
  • Meanwhile, we think investors could enjoy 9.3% maintenance capex historically.



Refer to the 19-page PDF report attached for complete analysis.





William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-09-27
SGX Stock Analyst Report HOLD Initiate HOLD 0.17 Same 0.17



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