Tech Manufacturing Services Sector - CGS-CIMB Research 2019-08-21: 3Q19F Will Remain Challenging


Tech Manufacturing Services Sector - 3Q19F Will Remain Challenging

  • The trade war between China and the US has impacted 2Q19 results and continues to be the number one concern for companies under our coverage.
  • We see FRENCKEN GROUP (SGX:E28) as best positioned to post double-digit y-o-y earnings growth in 3Q19F, but an industrial automation slowdown in FY20F is a concern.
  • SUNNINGDALE TECH (SGX:BHQ) could still be in for a tough time in 2H19F as it manages its cost structure and remains exposed to the weak automotive sector in China.

Trade tension impact starting to be felt

  • In the recently-concluded second quarter results season for Singapore technology-related manufacturing companies, it is clear that the impact of the ongoing China-US trade war is being felt, primarily in the form of uncertainty and/or delays in customers’ plans. As customers seek to mitigate the risks arising from the production of their products in China, we believe Southeast Asia, including Singapore, which has traditionally been an alternative manufacturing hub to China, will benefit.

Most companies came in below expectations

  • Of the 12 companies that recently reported their 2Q19 quarterly results, some 42% came in below our expectations, 33% came in above our expectations, and 25% reported earnings that were in line with our expectations.
  • Revenue decline was the key factor behind the earnings misses, but we note that most of companies have been vigilant in managing costs also.

Trade tension impact likely to continue into 2H19F

  • Companies remain concerned over the impact of the trade war and its resolution. We note that companies under our coverage are mostly in a net cash position and could be beneficiaries of any opportunities arising from the US-China trade war.
  • VALUETRONICS (SGX:BN2), for example, has plans to acquire a plot of land in an industrial park to build its own manufacturing campus. Earlier on, the company had leased a site in Vietnam to manufacture products for its customers.

3Q19F outlook

  • Looking into 3Q19, we think that among the companies under our coverage, Frencken will continue to deliver double-digit earnings growth, driven by its industrial automation segment, while Sunningdale Tech could see a double-digit earnings decline given its exposure to the weak automotive segment in China. We maintain our Neutral rating on the sector.
  • Upside risks to our forecasts are a resolution of the China-US trade war while downside risks are further delays in customers’ orders.
  • Our top pick is Frencken and our Reduce call is on Sunningdale Tech.

3Q19F Company Outlook Statements

Company FYE Outlook
AEM HOLDINGS LTD (SGX:AWX) Dec FY19F revenue guidance of between S$265m-280m.
CEI LIMITED (SGX:AVV) Dec Expects to remain profitable in FY19. Order book of S$59.6m for delivery in 2H19.
FRENCKEN GROUP LIMITED (SGX:E28) Dec On balance neutral outlook for 3Q19 with some segments seeing moderate growth and easing in some segments.
FU YU CORPORATION LTD (SGX:F13) Dec Challenging outlook due to trade war and volatile foreign exchange rates. Will continue to optimise cost.
GRAND VENTURE TECHNOLOGY LTD (SGX:JLB) Dec Semicon segment expected to remain soft. Recovery will be FY20 at the earliest. Continues to reach out to new customers.
ISDN HOLDINGS LIMITED (SGX:I07) Dec 2H19 core motion control business to remain challenging. Hydropower business contribution could increase though still not significant.
JADASON ENTERPRISES LTD (SGX:J03) Dec Expects challenging 2H19 due to trade war. 5G is an opportunity but pace of rollout could be delayed by trade tensions.
RIVERSTONE HOLDINGS LIMITED (SGX:AP4) Dec Expansion on track. Risks in macroeconomic conditions, exchange rates and competition amongst peers.
SUNNINGDALE TECH LTD (SGX:BHQ) Dec Expects 2H19 to be better than 1H19. Positive on further growth in the Healthcare segment but worried over the demand situation from the Automotive segment still.
UMS HOLDINGS LIMITED (SGX:558) Dec Trade war and South Korea-Japan dispute are concerns for 2H19. However, we are encouraged that company is seeing stable business volumes.
VALUETRONICS HOLDINGS LIMITED (SGX:BN2) Mar Trade tensions affecting Valuetronics negatively but the group expects to remain profitable in FY20.
VENTURE CORPORATION LIMITED (SGX:V03) Dec Concerned over trade war in short-term. Confident on long-term prospects.

Company highlights

AEM HOLDINGS LTD (SGX:AWX) (Rating: ADD, Target Price S$1.23)

  • Among the tech manufacturing stocks under our coverage, AEM offers the best visibility going into 2H19F. AEM has guided for a full-year revenue of S$265m- 280m. It guided for orders received to be delivered in FY19 at S$255m.
  • We believe AEM is benefitting from its major customer’s ongoing production ramp-up into 10nm chips. We think that even going into 1Q20F, the group could still see strong demand from its major customer, which we think will want to have the 10nm server chips in high volume by 1H20F.
  • Seasonally, looking at FY17 and FY18 performance, 3Q is typically better than 2Q. If this repeats in FY19F, there will be upside earnings risk to our FY19F numbers, as we have not assumed that 3Q19F will be better than 2Q19, given the strong performance in the second quarter.
  • See report: AEM Holdings Ltd - Better-Than-Expected 2Q.

FRENCKEN GROUP LIMITED (SGX:E28) (Rating: ADD, Target Price S$0.95)

  • Frencken’s 3Q19F outlook statement seems muted, but we think y-o-y double-digit earnings growth remains a possibility as Frencken’s industrial automation segment continues to do well. We think Frencken has also started delivering components to a new semiconductor customer. The risk to our earnings forecast will be in its industrial automation segment, where orders could moderate in FY20F.
  • See report: Frencken Group Ltd - Better-than-expected 2Q19.

SUNNINGDALE TECH LTD (SGX:BHQ) (Rating: REDUCE, Target Price S$1.14)

  • Sunningdale Tech has been negatively affected by the weakness in the automotive sector in China. Going into 2H19, Sunningdale Tech expects the utilisation of its Penang plant to increase and also, the shift from its Shanghai plant to lower-cost Chuzhou should be completed by end-3Q19. These support our return to profitability forecast for 3Q19F.
  • We downgraded Sunningdale Tech to a Reduce post its 2Q19 results. A resumption of profit growth will be needed for the stock to be re-rated again.
  • See report: Sunningdale Tech - Needs To Regain Investors’ Confidence.

UMS HOLDINGS LIMITED (SGX:558) (Rating: HOLD, Target Price S$0.55)

  • We upgraded UMS Holdings from Reduce to Hold as we think the FY19F slowdown in the semiconductor industry has been priced in. We were also encouraged by the company’s comments that it has been seeing stable orders from its major customer. Dividend yields are still respectable at 6.0%.
  • Going forward, UMS is also trying to diversify from its dependence on the semiconductor industry via its investments in the aviation industry through its associate JEP HOLDINGS (SGX:1J4).
  • See report: UMS Holdings Ltd - Industry Downturn Likely Priced In.

VENTURE CORPORATION LIMITED (SGX:V03) (Rating: ADD, Target Price S$16.28)

  • Our rating for Venture Corp was also recently upgraded, as its 2Q19 results reinforced our belief that the group could at least see 2H19F earnings match that of its 1H19 number. Typically, Venture Corp experiences a stronger 2H than 1H. However, the risks to our 2H forecasts hinge on Venture Corp’s customers’ product launch decisions and the aggressiveness of these product launches, which, in turn, are directly impacted by how the China-US trade war pans out.
  • If most of Venture Corp’s customers’ product launches are near end-3Q19 and if successful, the greater production benefit to Venture Corp could occur in 4Q19F.
  • In 2Q18, Venture Corp guided that there was some volatility in the near term from customers’ M&As, new product/platform transitions, US-China trade war and component shortages. The group subsequently reported a 27% y-o-y decline in sales and a 28% y-o-y decline in net profit in 3Q18. In its 2Q19 results commentary, Venture Corp guided that it anticipates the volatile environment to persist, but the group has in place several initiatives to help it navigate this dynamic environment. Taking this guidance into consideration, our base case assumption is for the 2H19F net profit to be spread equally over 3Q and 4Q at the moment.
  • See report: Venture Corporation - 2Q19 Better Than Expected.

William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-21
SGX Stock Analyst Report ADD MAINTAIN ADD 1.230 SAME 1.230