Valuetronics Holdings

Phillip Securities Research, May 19

VALUETRONICS provides OEM (original equipment manufacturing) and ODM (original design manufacturing) services via two business segments of Consumer Electronics Products (CEP), and Industrial and Commercial Electronics Products (ICE). They have more than 20 years of operations with revenues crossing HK$2 billion since 2012.

Established in 1992, Valuetronics has maintained relevance by growing from an integrated EMS provider, towards a premier design and manufacturing partner for the world's leading brands in the consumer, industrial and commercial electronics sectors. This relevance manifests itself in ~27 per cent and 18 per cent revenue CAGR (compounded annual growth rate) in both CE and ICE ending FY13, as well as having more than 80 per cent of repeat customers.

Trading at attractive values with net cash accounting for 53 per cent of market cap, a conservatively estimated idle cash of 26 per cent of market cap.

PE of 5.5x, PE excluding idle cash of 4.0x. Earnings growth is likely to be single digit. Shows ability to maintain revenue and bottom-line growth in their continuing operations excluding loss-making licensing business segment

If we ignore the loss-making licensing business that they have fully written off and discontinued, their CE and ICE have increased at 27 per cent and 18 per cent revenue CAGR respectively. Continuing three-year net profit CAGR is 26 per cent from FY10 to FY13.

They have managed to mitigate the increasing costs of wages in their China operations with cost-cutting and automation projects.

LED lighting for general lighting burgeoning at a value sweet spot - mid expansion phase amid falling prices.

LED light manufacturing for a prominent multinational accounts for 40 per cent of their revenues. The LED general lighting market is estimated to be 64 billion euros (S$109.7 billion) by 2020 (nine billion euros in 2011) - with ~45 per cent sales CAGR but a -15 per cent price CAGR to 2016 for LED retrofit lamps. As price drops, LED lights will be penetrating into mainstream causing increasing sales and by 2020 will render the older incandescence bulbs obsolete; 2013 to 2016 is considered the sweet spot in terms of value of the LED lighting market for manufacturers.

We believe it is more than fair that Valuetronics should at least trade at the peer average PE of 7.8x given that Valuetronics has operated on good net margins of more than 5 per cent vs the typical 3 per cent, never turned in a loss-making year even from before IPO, and has done so without leverage (having a net cash ratio to market cap of ~50 per cent).

Assuming FY14 net earnings of HK$139 million, this implies a FY14PE of 5.5x. Putting Valuetronics at 7.8x implies a value of S$0.48. Adding S$0.09 per share of idle cash gives us $0.57. This is conservative considering we are only taking half the net cash into our value consideration, and the global GDP recovery and favourable LED lighting cycle should provide a tailwind buffer.

Finally, to conservatively account for any unaccounted unsystematic risks, we apply a 25 per cent discount and we arrive at our final fair value of S$0.43, or a total 28 per cent upside (inclusive of any dividend) from last Friday's price of S$0.335.

TRADING BUY