Singapore Technology Sector - Maybank Kim Eng 2019-01-07: Riding Out The Turbulence

VENTURE CORPORATION LIMITED (SGX:V03) HI-P INTERNATIONAL LIMITED (SGX:H17) VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Singapore Technology Sector - Riding Out The Turbulence

We are lowering ROE-g/COE-g Target Prices across our Singapore tech coverage, to factor in:
1. cuts to our earnings forecasts amid heightened macro uncertainty; and
2. higher COEs to factor in increased volatility within the sector.
We believe sentiment in the sector could remain negative near term amid a foggier outlook, and volatility could persist.
For sector exposure, we prefer companies with stronger resilience to the US-China trade war and macro uncertainties. Hence, Venture Corp is our top pick. In our view, Hi-P International is the most vulnerable due to pricing pressure and exposure to highly cyclical end-markets, and we downgrade it to SELL from HOLD.

We score the three stocks to understand their resiliency in the face of the US-China trade war and increasing macro uncertainty.
In our view, VENTURE CORPORATION LIMITED (SGX:V03) is the most resilient due to strong customer diversification, whilst being a potential beneficiary of the trade war due to its Southeast Asian-centric production footprint. We think HI-P INTERNATIONAL LIMITED (SGX:H17) is the most vulnerable. Its largest customer Apple (40-50%) recently cut revenue guidance, and we estimate up to 80% of the electronics end-markets that Hi-P International is exposed to are consumer discretionary in nature.

While the earnings revision for Hi-P International is reactionary to the Apple guidance cut, revisions for Venture Corp and VALUETRONICS HOLDINGS LIMITED (SGX:BN2) are preemptive amid an increasingly cautious outlook.
For Venture Corp, we are concerned that softening manufacturing activity globally may eventually temper US capex appetite, in turn slowing the momentum of its multi-quarter sequential earnings recovery.
Meanwhile, we are concerned that Valuetronics is vulnerable to a downturn in consumer sentiment and/or an escalation in the trade war, due to exposures to smart-lighting (discretionary spending item) and products affected by tariffs (20% of revenue).

Volatility of stocks under our coverage has increased in the months following our coverage initiations from Dec-17 to Mar-18. Amid reduced visibility and heightened risks, we think higher volatility could persist. Hence, we have raised the COEs of our coverage stocks to reflect this.
We believe strong cash flows imply that Valuetronics and Venture Corp’ dividend yields of 6-7% (FY19-21E) and 4.7% (2018-20E) are intact.

Amid a cautious outlook for 2019, we prefer companies that exhibit resilience to:
1. the US-China trade war; and/or
2. peaking or slowing growth in major economies.
Our top pick is Venture Corp, which we prefer over Valuetronics, as:
1. Venture Corp’ products are largely insulated from tariffs. 20% of Valuetronics’ revenue are affected by tariffs; and
2. Venture Corp is a potential beneficiary of the trade war, given its sizeable production footprint in Singapore and Malaysia. In contrast, both of Valuetronics’ production sites are China.
We are least constructive on Hi-P International. We continue to see earnings pressure from pricing concerns and elevated costs. Hi-P International’s production is also mostly based in China. A big portion of its products is consumer discretionary items, which we deem vulnerable to a negative turn in consumer sentiment.
We score our companies’ resilience. Each company is rated for its:
1. production locations,
2. end-market dynamics,
3. customer diversification,
4. pricing dynamics and cost structure and
5. balance sheet strength.
Companies earn 3 points for each “Resilient” rating; 2 for “Somewhat resilient”; 1 for “Somewhat vulnerable”; and 0 for “Vulnerable”. Refer to Fig1 in the PDF report attached.

We cut earnings by 2-9 % for stocks under coverage. While we cut Hi-P International’s EPS as a result of Apple’s negative revision in guidance, our cuts for Venture Corp and Valuetronics are more preemptive. We believe their outlook could worsen if the present caution is prolonged.
Refer to the summary table in the PDF report attached.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-01-07

SGX Stock Analyst Report BUY MAINTAIN BUY 17.480 DOWN 22.23

SELL DOWNGRADE HOLD 0.680 DOWN 0.84

BUY MAINTAIN BUY 0.90 DOWN 0.960