Fu Yu Corp - CGS-CIMB Research 2020-11-12: Growth Returns

FU YU CORPORATION LTD (SGX:F13)

Fu Yu Corp - Growth Returns

Fu Yu's 9M20 core net profit of S$12.3m (+36.7% y-o-y) was above our and consensus forecasts, mainly due to product mix changes and cost reduction efforts.
We think the cost reduction efforts will improve margins and drive net profit growth in FY21F-FY22F.
Upgrade Fu Yu to ADD as we expect the higher margins to drive ROE expansion.

Fu Yu (SGX:F13) reported 9MFY20 core net profit of S$12.3m, above expectations at 95%/86% of our/Bloomberg consensus FY20F forecasts. This was mainly due to
1. gross profit margin expansion in 9M20 to 23.5% from 18.0% in 9M19 due to lower revenue contribution from printing and imaging products which generate lower margins and higher revenue contribution from better margin medical devices, and
2. lower operating expenses y-o-y with the closure of its Chongqing and Shanghai facilities.

Fu Yu's 9M20 revenue was below our and Bloomberg consensus expectations at 65%/68% of FY20F forecasts. In 9M20, Singapore revenue benefitted from higher sales of consumer products while the printing and imaging (P&I) and automotive segments experienced sales declines.
In Malaysia, the medical segment experienced higher sales y-o-y in 9M20 offset by y-o-y declines in sales of consumer products and power tools.
In China, all product segments saw revenue decline in 9M20. However, we note that revenue growth recovered on a q-o-q basis in Fu Yu’s operations in three countries (China, Malaysia and Singapore).
In 1H20, Fu Yu’s operations in Malaysia were affected by the movement control order which led to the suspension of operations for some of its customers.

We raise our Fu Yu's FY20F-FY22F net profit forecast by 13.2%-19.9% as we factor in the higher gross profit margin achieved by Fu Yu. We also lower our operating expenses to factor in cost reductions achieved from the closure of its Chongqing and Shanghai facilities. Our Gordon Growth derived P/BV multiple rises to 1.30x (previously 1.10x) as ROEs improve on the back of improved margins.
At 1.30x FY20F BVPS of S$0.222, our target price rises to S$0.29 and we upgrade our recommendation to ADD (from Hold previously).
Fu Yu's Projected FY20F-FY22F dividend yield is 6.8%. We estimate Fu Yu’s net cash position as at end-FY20F to be S$90.6m (zero debt balance sheet).
See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News.
As at end-Sep 2020, net cash was 51.2% of Fu Yu’s market cap.
Downside risks are unfavourable foreign exchange movements, increased competition, worsening COVID-19 outbreak in the coming winter and pricing pressure from customers.
Higher-than–expected earnings growth is a re-rating catalyst.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-12

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