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

Singapore Technology Sector - Maybank Kim Eng Research | SGinvestors.io VENTURE CORPORATION LIMITED (SGX:V03) HI-P INTERNATIONAL LIMITED (SGX:H17) VALUETRONICS HOLDINGS LIMITED (SGX:BN2)

Singapore Technology Sector - Riding Out The Turbulence

Earnings cuts and higher COEs across the board

  • 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.



VMS most resilient; HI-P most vulnerable

  • 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.


Persisting uncertainty translates to softer prospects?

  • 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).


Higher sector volatility

  • 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.


Favouring resilience amid turbulence

  • 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.


Earnings and Target Price revisions

  • 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.


Company Reports






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



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