Valuetronics Holdings

UOBKayhian on 10 Aug 2012

Key takeaways from analyst briefing:

·   Results below par. Valuetronics Holdings’ (Valuetronics) 1QFY13 net profit declined 18.7% yoy to HK$25.7m, or 18.6% of our full-year profit forecast. This was below our expectations mainly due to proportionately higher-than-expected revenue contribution from lower-margin LED lighting products.

·   Revenue up 20.4%. 1QFY13 revenue was up 20.4% yoy to HK$634.5m. Consumer electronics revenue grew 36.9% yoy due to increased contribution from LED lighting products, while industrial and commercial electronics revenue declined 9.0% due to global economic challenges.

·   Cessation of licensing business. As a result of shrinking market penetration and widening losses, Valuetronics has also decided to terminate the licensing business by 2012. Termination expenses and impairment charges are estimated at HK$28m and will be recognised in 2QFY13.

Stock Impact

·   Challenging environment ahead. We expect Valuetronics to face challenges ahead due to: a) weaker demand from industrial and commercial customers, which make up a quarter of sales, b) margin erosion in LED lighting products, which contribute almost half of top-line, and c) rising labour cost.

·   Margin erosion. In the next five years, we believe that retail prices for LED light bulbs will decline faster than component costs, resulting in margin erosion for the OEMs. China-based OEMs like Valuetronics may see added margin pressure as many new OEM entrants cut prices to win market share.

·   ROE decline. Although we expect Valuetronics to grow LED lighting sales by 15-20% annually, we believe that declining margins will offset top-line growth. In addition, the group must also continually invest in fixed assets to support volume growth amid falling profitability, which will weigh on ROE.

Earnings Revision

·    Slashed forecast. We have increased our revenue forecast by 6.6% and 12.4% in FY13 and FY14 respectively. However, we have also reduced core profit by 32.2% and 32.9% in FY13 and FY14 respectively to account for lower-than-expected margins.

Valuation/Recommendation

·    Downgrade to SELL with lower target price of S$0.16 (previously S$0.31), representing 19.2% downside from current price. Our target price is pegged to 3.9x FY13 PE (previously 5.0x), 0.5 SD below 5-year average forward PE of 4.9x.