Simons Trading Research

Author: simonsg   |   Latest post: Tue, 20 Oct 2020, 12:11 PM


Sunningdale Tech Ltd - Challenging 2019F Awaits

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  • Sunningdale Tech’s manufacturing presence outside of China will help the company better manage the challenges present in the current trade war.
  • We think earnings over FY18-20F will be under pressure from rising production costs.
  • Our earnings cuts factor in a tougher operating environment. Our Target Price is reduced to S$1.84, based on a lower P/BV of 0.92x (as ROEs decline).

Leeway to deal with trade war

  • We think Sunningdale Tech could benefit from the shift of manufacturing out of China due to the US-China trade war.
  • Sunningdale has ready facilities in Thailand, Malaysia and Indonesia in South East Asia to serve customers. We believe there have been inquiries from customers (both new and old) on the possibility of having some of their manufacturing requirements met outside of China.

Global big concern

  • We believe the bigger Sunningdale Tech is a demand for its customers’ products or delays in customers. If a slowdown does price intensify.

Cost pressures unlikely to ease

  • Rising wages remain a concern for Sunningdale Tech. Although the company has automated where it is cost effective, the group still employs an estimated 9,000-strong workforce.
  • Other cost pressures include higher utilities cost and raw material prices as well as product packaging cost. As a case in point, Memtech highlighted higher product packing cost in its 2Q18 results commentary.

USMCA opportunity?

  • USA, Canada and Mexico have reached an agreement to replace the North American with a new trade agreement known as the United States. Under 75% of their components manufactured in Mexico, the US for zero tariffs.
  • Sunningdale Tech has Mexico. The USMCA could provide further Sunningdale Tech in Mexico.

Cut earnings

  • We believe revenue growth is likely to slow in FY19-20F as the world grapples with trade tensions and higher interest rates. We believe gross margins will likely decline as input costs increase and the ability to raise prices is limited.
  • Our ROE/COE-derived P/BV multiple falls to 0.92x (previously 1.02x), leading to a new Target Price of S$1.84.
  • Better cost is a potential catalyst.
  • A slowdown in customer orders is a downside risk.

Source: CGS-CIMB Research - 26 Oct 2018

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