Valuetronics

OCBC on 10 Aug 2012

Valuetronics Holdings Limited (VHL) reported 1QFY13 revenue of HK$634.5m (+20.4% YoY) which was within our expectations. However, PATMI dipped 18.7% YoY to HK$25.7m and missed our estimates due to lower-than-expected gross margin. Topline and bottomline formed 23.8% and 18.8% of our full-year estimates, respectively. What surprised us was management’s decision to cease its Licensing business. This was attributed to increasing headwinds from a tepid US economy and intense competition. Hence management believes that it would likely incur heavier losses in FY13 if it continues the Licensing operations. We slash our FY13 and FY14 PATMI forecasts by 40.3% and 28.0% respectively, due largely to lower gross margin assumptions, but partially mitigated by lower operating expenses. We downgrade VHL to HOLD with a lower fair value estimate of S$0.21 (previously S$0.315) to reflect the group’s weaker fundamentals and increasing dependency on its largest customer.

1QFY13 PATMI below expectations
Valuetronics Holdings Limited (VHL) reported 1QFY13 revenue of HK$634.5m, which represented a 20.4% YoY jump and was within our expectations. However, PATMI dipped 18.7% YoY to HK$25.7m and missed our estimates due to lower-than-expected gross margin. Topline and bottomline formed 23.8% and 18.8% of our full-year estimates, respectively. VHL reclassified its three business segments into Consumer Electronics (CE), Industrial and Commercial Electronics (ICE) and Licensing this quarter, given the blurring differences between its previous OEM and ODM segments. Strong YoY revenue growth of 36.9% in the CE segment was partially offset by weakness from its ICE (-9.0%) and Licensing (-50.4%) segments.

Pulling the plug from loss-making Licensing segment
What surprised us was management’s decision to cease its Licensing business given significant challenges ahead from a tepid US economy and intense competition which resulted in a shrinkage in its market penetration. We had previously estimated this segment to achieve breakeven in FY14. VHL expects to incur total termination expenditure of HK$28m, which would be booked in 2QFY13. Management believes that it would likely incur heavier losses in FY13 if it continues the Licensing operations given significant advertising and promotion subsidies to retailers.

Fundamentals weakened, downgrade to HOLD
We slash our FY13 and FY14 PATMI forecasts by 40.3% and 28.0% respectively, due largely to lower gross margin assumptions, but partially mitigated by lower operating expenses. We expect margin pressure for VHL to continue, given the decline in ASPs typical for LED lighting products and the ability of its largest customer to squeeze its margins in exchange for higher volume orders. We ascribe a lower valuation peg of 4.5x (previously 5x) to our FY13F core EPS estimate to reflect the group’s weaker fundamentals and increasing dependency on its largest customer. We downgrade VHL to HOLD, with a lower fair value estimate of S$0.21 (previously S$0.315).