Valuetronics

OCBC on 5 Nov 2014

• 2QFY3/15 results in line. Revenue and net profit down 0.7% and 8.4% YoY respectively.
• Continues to face fierce competition and price pressure in lighting, a de-rating catalyst. EPS trimmed by about 1%.
• Maintain contrarian SELL and SGD0.25 TP, at 4.4x FY16E EPS.

Lighting continues to languish
1H15 earnings fell 3.7% YoY to form 52% of our FY15E forecast. Consumer Electronics revenue declined a steeper 11.2% YoY and we expect the weakness to continue in the mid-term as competition in LED lighting worsens. In its results announcement, management said that they will “proactively manage our reliance on this segment” which, we believe, suggests it could reduce its exposure or even exit the business completely if things get worse. We had initially modelled in an 8% revenue decline for Consumer Electronics for FY15E-17E, but now expect an 11-12% contraction. This brings down our FY15E-17E EPS by about 1%. We also expect further margin pressure in 2H15. Consumer Electronics gross margin was an estimated 9% in 1H15, and we continue to forecast 8.2% for the full year.

Industrial growth to moderate
Industrial revenue increased 30.6% YoY to HKD468m in 1H15, in line with our forecast. This division has been strong in recent quarters, thanks to clients’ outsourcing of their production to Valuetronics from the third quarter of last year. We expect YoY growth to moderate to 10-15% by 4Q15, as the customers complete the migration of their production.

Maintain SELL
Maintain SELL with de-rating catalysts expected from further sets of weak results, especially from lighting. TP unchanged at SGD0.25 or 4.4x FY16E EPS, based on zero value for its lighting business and 4-6x PER for its non-lighting Industrial businesses.

Valuetronics

Kim Eng on 6 Nov 2014

• 2QFY3/15 results in line. Revenue and net profit down 0.7% and 8.4% YoY respectively.
• Continues to face fierce competition and price pressure in lighting, a de-rating catalyst. EPS trimmed by about 1%.
• Maintain contrarian SELL and SGD0.25 TP, at 4.4x FY16E EPS.

Lighting continues to languish
1H15 earnings fell 3.7% YoY to form 52% of our FY15E forecast. Consumer Electronics revenue declined a steeper 11.2% YoY and we expect the weakness to continue in the mid-term as competition in LED lighting worsens. In its results announcement, management said that they will “proactively manage our reliance on this segment” which, we believe, suggests it could reduce its exposure or even exit the business completely if things get worse. We had initially modelled in an 8% revenue decline for Consumer Electronics for FY15E-17E, but now expect an 11-12% contraction. This brings down our FY15E-17E EPS by about 1%. We also expect further margin pressure in 2H15. Consumer Electronics gross margin was an estimated 9% in 1H15, and we continue to forecast 8.2% for the full year.

Industrial growth to moderate
Industrial revenue increased 30.6% YoY to HKD468m in 1H15, in line with our forecast. This division has been strong in recent quarters, thanks to clients’ outsourcing of their production to Valuetronics from the third quarter of last year. We expect YoY growth to moderate to 10-15% by 4Q15, as the customers complete the migration of their production.

Maintain SELL
Maintain SELL with de-rating catalysts expected from further sets of weak results, especially from lighting. TP unchanged at SGD0.25 or 4.4x FY16E EPS, based on zero value for its lighting business and 4-6x PER for its non-lighting Industrial businesses.

Valuetronics

Kim Eng on 14 Oct 2014

• Initiate with SELL, TP SGD0.25 (4.4x FY16E P/E). Earnings forecast to decline in next two years.
• Major customer spinning off LED lighting business, given fierce Chinese competition, price wars and falling margins.
• Stock unlikely to perform until uncertainties blow over. We would be buyers only at SGD0.25 or below.

Facing uncertain future
Valuetronics faces an uncertain future as its largest customer – a  Dutch lighting, consumer electronics and healthcare conglomerate  - has decided to split its lighting business from the rest of its
businesses, in order to focus on higher-margin, less-challenging  segments. Lighting, in particular LED lighting, accounts for 40% of  Valuetronics’s revenue and 30% of its gross profit.

Lighting business dimming
Premium LED lighting brands are being undercut by cheaper  Chinese products. Valuetronics’s customer has had to cut its prices  as it repositions its brand in the consumer mass market. Valuetronics’s margins in 1QFY15E were affected by the price cuts.  Despite its customer’s split, the worst still lies ahead, in our view. We expect Valuetronics’s profits to decline in the next two years.

Industrial not yet ready to compensate
With the slump in lighting, Valuetronics’s Industrial business will  have to shoulder the burden of growth. However, we do not think  Industrial’s growth will be enough to offset the decline in the lighting-heavy Consumer Electronics division. Some 60% of  Valuetronics’s revenue comes from lighting products for its Dutch  customer.

SELL with SGD0.25 TP (4.4x FY16E P/E)
Valuetronics trades at 7.0x FY16E P/E vs a sector average of 9.9x.  However, with major uncertainties ahead, we believe it is likely to  underperform. Our TP assigns zero value to its lighting business  and 6-4x P/E to its Industrial and non-lighting businesses, or 60- 40% of its peer averages. Overall, we value the group at 4.4x P/E.

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

Valuetronics Holdings

UOBKayhian on 12 Nov 1013

Valuation

• Valuetronics Holdings Ltd (Valuetronics) is trading at 6.7x FY13 PE  and 0.8x P/B.

Results

• 1HFY14 revenue flat but gross profit up 11%. While revenue remained flat in 1HFY14, gross profit increased 11.4% yoy due to a higher contribution from the industrial and commercial electronics (ICE) segment. Gross margin improved from 12.0% in 1HFY13 to 13.1% in 1HFY14.
• Growing ICE segment. 1HFY14 revenue from the ICE segment increased 16.5% yoy with contributions from 2 new customers.
• No more profit drag from discontinued operation. With the termination of the licensing business in FY13, Valuetronics will not be incurring further expenditure for the loss-making business. Excluding the impact of the discontinued licensing business, profit from continuing operations increased 8.8% yoy for 1HFY14.

Investment highlights

• Net cash forms half of market cap. Valuetronics has a net cash position of S$0.127/share, which forms about 54% of its current market cap. Besides maintaining a strong net cash position for working capital requirements, Valuetronics’ strong balance sheet also serves as a form of reassurance to its existing and new customers with regard to the stability of its manufacturing capabilities and its ability to continue as a going concern.
• Stable dividend payout with attractive yield. Valuetronics has been paying out dividends to shareholders since its listing in FY07. Despite seeing a huge decline in profits after it discontinued its licensing business in FY13, Valuetronics still paid a dividend of HK$0.08/share (S$0.013/share), which translates into an attractive yield of 5.5%. Given that Valuetronics’ 1HFY14 net profit already forms 92.7% of its FY13 net profit, we expect to see a rise in dividends in FY14.
• Valued OEM partner of the world’s leading electronics brands. With 20 years of operating history, Valuetronics is a valued original equipment manufacturer (OEM) for several listed leading brands in the consumer, industrial and commercial electronics sectors. With its strategic relationships and quality production, Valuetronics has remained profitable, even during the 2008 economic downturn.
• Key risks. Rising labour and material costs continue to be a key concern for Valuetronics, as wages continue to rise in China.

Valuetronics

OCBC on 6 Aug 2013

Valuetronics Holdings Limited (VHL) will begin FY14 on a fresh page, as it will no longer incur losses on its Licensing business following its decision to terminate operations in 2QFY13. Any recovery in VHL’s earnings will likely translate into higher dividends for its shareholders, in our view, as VHL had a relatively stable dividend payout ratio of 37-42% from FY10-13. This is also supported by VHL’s strong net cash position. Looking ahead, we believe that VHL will focus its attention largely on its LED lighting OEM business, given the robust industry growth prospects and its largest customer’s market leadership position in this field. However, given the continued lack of trading liquidity in VHL’s stock and a reallocation of resources, we are CEASING COVERAGE on the stock. Our last rating was a ‘Hold’ with a fair value estimate of S$0.195.

Losses of Licensing division a thing of the past
Valuetronics Holdings Limited (VHL) had to endure a difficult FY13, as its decision to cease its Licensing segment resulted in one-off termination expenses and impairment losses on assets. This culminated in segment losses amounting to HK$39.8m in FY13, wider than the HK$30.0m loss reported in FY12, thus causing a drag on overall group profitability. Looking ahead, VHL will be able to start on a fresh page, as it will no longer incur further operating expenses from its Licensing business. Any recovery in VHL’s earnings will likely translate into higher dividends for its shareholders, in our view, as VHL had a relatively stable dividend payout ratio of 37-42% from FY10-13. In addition, VHL has a strong net cash balance of HK$221.6m as at 31 Mar 2013 (no debt), which forms 52% of its current market cap. 

Glowing growth potential of LED market
We believe that VHL will focus its attention largely on its LED lighting OEM business, given the robust industry growth prospects. McKinsey has forecasted the LED general lighting market to grow at a 45% and 15% CAGR from 2011-2016 and from 2016-2020, respectively. VHL’s largest customer holds a market leadership position in this field, and also recorded a solid 28% YoY growth in its LED-based sales for its 2Q13 results, driven by ongoing urbanisation and rising demand for energy efficient lighting solutions. LED lighting currently contributes 25% of this customer’s lighting portfolio, and this is expected to increase to ~45% by 2015, as highlighted in its recent results conference call. We expect VHL to be a beneficiary of this trend in the medium-to-long-term. In the near-term, however, while penetration rates of LED lighting are increasing, demand in Western Europe has been dampened by the tepid economic conditions. 

Ceasing coverage
Given the continued lack of trading liquidity in VHL’s stock and a reallocation of resources, we are CEASING COVERAGE on the stock. Our last rating was a ‘Hold’ with a fair value estimate of S$0.195.

Valuetronics Holdings

OCBC on 28 May 2013

Valuetronics Holdings Limited’s (VHL) FY13 results were within our expectations. Revenue from continuing operations fell 3.4% to HK$2,210.2m, or just 0.6% shy of our forecast. Net profit from continuing operations fell 26.1% to HK$118.4m, while net losses from its now discontinued Licensing division widened by 32.7% to HK$39.8m, resulting in overall PATMI decline of 39.6% to HK$78.7m. Excluding exceptional items, we estimate that core PATMI for FY13 fell 14.7% to HK$103.7m (1.1% above our estimate). VHL also slashed its FY13 DPS from HK$0.17 to HK$0.08. This was below our HK$0.11/share forecast but still translates into a decent yield of ~6.0%. We foresee an improvement in VHL’s bottomline and DPS in FY14 as it does not expect to incur any further expenses for its Licensing business. We maintain our HOLD rating but raise our fair value estimate slightly from S$0.19 to S$0.195 due to a marginal 2.7% increase in our FY14 core PATMI forecast.

FY13 results in-line with our expectations
Valuetronics Holdings Limited (VHL) reported FY13 results which were within our expectations. Revenue from continuing operations fell 3.4% to HK$2,210.2m, or just 0.6% shy of our forecast. The decline was attributed to a 6.1% fall in sales from its Consumer Electronics segment, but partially offset by a 4.0% rise in revenue from its Industrial and Commercial Electronics (ICE) customers. Net profit from continuing operations fell 26.1% to HK$118.4m, while net losses from its now discontinued Licensing division widened by 32.7% to HK$39.8m, resulting in overall PATMI decline of 39.6% to HK$78.7m. Excluding the one-off termination expenditure and impairment of PPE from its Licensing division and other exceptional items, we estimate that core PATMI for FY13 fell 14.7% to HK$103.7m. This was 1.1% above our estimate.

Dividends cut but still translates into a yield of ~6.0%
Given the sharp decline in VHL’s reported PATMI, its DPS for FY13 was consequently slashed from HK$0.17/share (this includes a HK$0.01 special dividend) to HK$0.08/share. This represents a payout ratio of ~36.5% and was below our HK$0.11 DPS forecast. However, this still translates into a decent yield of ~6.0%.

No further losses from Licensing business; maintain HOLD
Following management’s decision to cease its Licensing division, VHL does not expect any further expenses to be incurred for this business in FY14. Hence we foresee an improvement in its bottomline in FY14 due to the hefty losses incurred in FY13. This would likely result in an improvement in its FY14 DPS (OIR forecast: HK$0.11/share). We lower our FY14 revenue forecast by 3.6% but raise our core PATMI estimate by 2.7% as we expect VHL to place stronger focus on its higher margin ICE business. Our FY15 projections are also introduced. We derive a slightly higher fair value estimate of S$0.195 (previously S$0.19), still pegged to 4x FY14F EPS. Although VHL trades at 4.3x and 0.73x FY14F PER and PBR, respectively, we maintain our HOLD rating on the stock given the still challenging outlook and lack of near-term catalysts.

Valuetronics Holdings

OCBC on 6 Feb 2013

Valuetronics Holdings Limited’s (VHL) 3QFY13 results were below our expectations. Revenue from continuing operations fell 16.3% YoY to HK$508.1m, or 10.5% below our forecast. Estimated core PATMI declined 17.9% to HK$23.9m and fell short of our projection by 16.2%. This was driven by a slowdown in demand from some of its customers, while ASP pressures also exacerbated the challenging operating conditions. On a positive note, VHL ended the Dec-quarter with a healthy net cash balance of HK$234.7m, which would act as a buffer in light of the still uncertain macroeconomic environment. We pare our FY13 and FY14 revenue forecasts by 5.0% and 4.3%, and our core PATMI projections by 9.3% and 7.4%, respectively. We also roll forward our valuations to 4x FY14F EPS, and our fair value estimate is lowered from S$0.20 to S$0.19. Maintain HOLD.

3QFY13 results below expectations
Valuetronics Holdings Limited (VHL) reported its 3QFY13 results which were below our expectations. Revenue from continuing operations fell 16.3% YoY to HK$508.1m, or 10.5% below our forecast. Reported PATMI dipped 22.2% YoY to HK$24.5m. Adjusting for exceptional items, we estimate core PATMI of HK$23.9m, a 17.9% YoY decline, and this fell short of our projection by 16.2%. VHL continued to incur operating losses (HK$1.1m) from its Licensing division, but this was a significant reduction from 2QFY13 (HK$31.2m) which includes HK$28.0m worth of one-off termination expenditure and impairment charges given its decision to cease operations of the division. For 9MFY13, revenue inched 1.0% higher at HK$1,731.0m, while estimated core PATMI of HK$80.5m represented a decline of 3.9%.

Slowdown in orders from some customers
VHL continued to experience a slowdown in demand from some of its Consumer Electronics (CE) customers, including its largest customer which deals with LED lighting products. However, the latter was due partly to inventory correction and a transition to more cost competitive chips used in its LED products, thus leading to softer orders for VHL in 3QFY13. There were also ASP pressures from some of its major customers, which contributed to the challenging operating conditions.

Strong financial position to weather the uncertainties
Despite its tepid 3QFY13 results, VHL managed to generate HK$71.6m of free-cash flows (3QFY12: HK$65.5m), thus ending the Dec-quarter with a healthy net cash balance of HK$234.7m. This forms approximately 49.6% of its market capitalisation. We expect VHL to use this cash to support its attractive dividend payouts and act as a buffer given the continued macroeconomic uncertainties.

Cut estimates and fair value but maintain HOLD
We pare our FY13 and FY14 revenue forecasts by 5.0% and 4.3%, and our core PATMI projections by 9.3% and 7.4%, respectively. We also roll forward our valuations to 4x FY14F EPS, and our fair value estimate is lowered from S$0.20 to S$0.19. Maintain HOLD.

Valuetronics Holdings Limited

OCBC on 15 Nov 2012

Valuetronics Holdings Limited’s (VHL) 2QFY13 PATMI plunged 88.5% YoY to HK$3.3m as it incurred hefty one-off termination expenses and provisions due to the cessation of its Licensing business. Revenue from continued operations was flat at HK$595.5m, or 11.6% below our forecast. However, we estimate that core PATMI came in at HK$31.5m, a 34.1% YoY increase, which exceeded our HK$26.2m projection. Looking ahead, we believe that sales from its largest customer would likely moderate, while there is also a strong sense of caution amongst its major customers. We trim our FY13 and FY14 revenue estimates by 9.7% and 10.6%, but raise our core PATMI forecasts by 8.0% and 6.5%, respectively, on higher margin assumptions. Applying a lower 4x (previously 4.5x) peg and rolling forward our valuations to blended FY13/14F core EPS, our fair value estimate falls from S$0.21 to S$0.20. While estimated 8.9% yield is attractive, we maintain HOLD given the lack of near-term catalysts.

2QFY13 core PATMI exceeded expectations
Valuetronics Holdings Limited’s (VHL) 2QFY13 revenue from continued operations (excluding its Licensing segment) was flat YoY at HK$595.5m (+0.2%), or 11.6% below our forecast. Reported PATMI plunged 88.5% YoY to HK$3.3m as VHL incurred hefty termination expenditure and provision for impairment on property, plant and equipment (PPE) from its Licensing division (announced its decision to cease operations during its 1QFY13 announcement). Adjusting for this and other exceptional items, we estimate core PATMI of HK$31.5m, a 34.1% YoY increase, and this exceeded our HK$26.2m projection. With regards to its Licensing division, VHL said that it does not expect to incur further provision for termination expenditure and impairment losses for PPE.

Moderation in growth from largest customer
Although VHL enjoyed exceptionally robust revenue growth from its largest customer from the LED lighting industry over the past several quarters, we believe that sales would likely moderate moving forward. Hence this could limit VHL’s growth opportunities as the group is also seeing a general sense of prudency amongst its major customers in light of the vagaries of the macroeconomic environment.

Maintain HOLD; expect lower DPS
We trim our FY13 and FY14 revenue estimates by 9.7% and 10.6%, but raise our core PATMI forecasts by 8.0% and 6.5%, respectively, on higher margin assumptions. We also adopt a more conservative PER peg of 4x (previously 4.5x) on VHL given its challenging outlook in the foreseeable future. Rolling forward our valuations to blended FY13/14F core EPS, we derive a reduced fair value estimate of S$0.20, from S$0.21 previously. A cut in DPS for VHL is highly likely in FY13, in our opinion, based on the estimated dip in our FY13 PATMI projection from FY12. Our 11 HK cents DPS forecast for FY13 translates into a payout ratio of 46.3% and 8.9% yield. While yield is attractive, we maintain HOLD given the lack of near-term catalysts.

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).

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.

Valuetronics Holdings Limited

OCBC on 21 June 2012

We believe that Valuetronics Holdings Limited (VHL) remains poised to leverage on the growth potential of the LED lighting market, given the positive sentiment from its largest customer within this space. We expect sustained orders for VHL in the near-to-mid term, although a likely trade-off from higher volume orders would be a compression in its gross margin. Meanwhile, downside risks from macro headwinds remain. We estimate that VHL’s Licensing segment would breakeven only in FY14, although operating losses are likely to narrow in FY13. We opine that VHL offers a good investment opportunity for investors looking for small-cap companies with attractive dividends. Coupled with cheap valuations as the stock trades at 4.1x FY13F PER, versus our projected EPS CAGR of 7.6% from FY12-14F, we maintain BUY and S$0.315 fair value estimate on VHL.

LED market has good growth potential despite pricing pressure
We believe that Valuetronics Holdings Limited (VHL) remains well-positioned to leverage on the increasing penetration rates of LED lighting. This is driven by increasing urbanisation and growing demand for environmentally-friendly lighting solutions. Many governments are also phasing out inefficient lighting technologies, thence leading to faster adoption of LED-based lighting solutions. A study conducted by the US Department of Energy has highlighted the potential of LED lighting to conserve energy and enhance lighting quality and performance vis-à-vis that of many conventional lighting technologies. Given that sentiment from VHL’s largest customer is still positive on this front, we believe this would lead to sustained orders for VHL in the near-to-mid term. A likely trade-off to this would be a compression in its gross margin from the higher volume orders, coupled with pricing pressures typical for LED products.

Licensing division likely to breakeven in FY14
Despite the positive outlook from its largest customer, downside risks from macroeconomic headwinds cannot be negated. While the U.S. reported a 5.3% YoY increase (-0.2% MoM) in retail sales for May, this was the lowest YoY growth reported since Aug 2010. Concerns over the eurozone debt turmoil and tepid labour market have undoubtedly stymied consumers’ ability and willingness to spend. We reckon this could have some adverse impact on VHL’s Licensing segment, although we still forecast sales to grow in FY13 and FY14 as the group expands its product portfolio and sales channels. We also expect smaller operating losses for the segment in FY13, and estimate breakeven to occur in FY14.

Reiterate BUY given cheap valuations and attractive yield
We opine that VHL offers a good investment opportunity for investors looking for small-cap companies with attractive dividends (last declared DPS of 17 HK cents, implied yield of 11%, trades ex-div on 23 Jul 2012). Current valuations are also cheap, in our opinion, with the stock trading at 4.1x FY13F PER, against our projected EPS CAGR of 7.6% from FY12-14F. Reiterate BUY and S$0.315 fair value estimate.

Valuetronics

Kim Eng on 29 Mar 2012


Background: Valuetronics is a smallish but innovative electronics manufacturing services (EMS) company, focused on OEM (80-85% of sales) and ODM (10-15%). Its management is based in Hong Kong and it has two factories in Guangdong Province in China (Huizhou City and Daya Bay). It also has a new licensing arm where it has taken on on design and manufacturing rights for certain of major customer Whirlpool’s product categories.

What makes it different: Valuetronics’ differentiating factor is its focus on green technology products (e.g. energy-saving LED lighting solutions for Philips) as well as customers with strong brands (e.g. Whirlpool – home comfort aids such as air purifiers, KitchenAid – high-end cooking appliances, and Graco – digital baby monitors).

Licensing business doing well despite poor economic conditions. A year from its inception, Valuetronics is seeing significant growth from its newest revenue stream – brand licensing. 9M12 revenue from licensing of $57m (3% of revenue) has already exceeded full year revenue of $33m in 2011 (1% of revenue). Valuetronics started with just one product in 2011 – an air purifier for Whirlpool. In 2012, it added two more products – an electric fan and a consumer heater. The main demand comes from major retailers in North America, and has been steadily growing despite the sluggishness of the US economy and lower consumer spending.

9M12 profit down but revenue, cashflow improved. Net profit fell 1% in 9M12 reflecting the impact of higher manufacturing challenges in the PRC, namely pricing pressure, Renminbi appreciation, higher labour costs and inflation. However, 9M12 revenue rose 23%, driven by strong growth by one of its OEM customers that outpaced the overall slowdown in demand from the category. Also, free cashflow improved and turned around on the back of lower working capital requirements.

10% dividend yield at 4x earnings. Valuetronics declared 14 HK cents/share in dividends in 2011, about 40% of its earnings. At current levels, this works out to almost 10% yield. Assuming flat earnings and the same payout ratio, dividend yield appears to be attractive for a cheap stock (just 4x price to earnings) with a decent business.

Shareholders recently sold shares. However, there may be an sentimental overhang as two major shareholders and directors of the company recently sold 26m shares at $0.24.