• Softer macroeconomic outlook to affect CE
• Risks to automotive growth story
• Upside from new customers

Consumer Electronics: Weakening fundamentals in China

Gartner’s Jan 2016 report forecasts a 1.9% growth for worldwide device shipments in 2016, down from the previous quarter’s forecast of 2.7%. While Memtech also supplies parts not captured in this category, such as wearables, we expect the growth of components such as keyboards, router shells, and Kindle light guides to be roughly in line with that of the device shipments market. Taking into account the softer macroeconomic outlook, we adjust our FY16 CE revenue growth forecasts to 35.2% YoY from 38.4% previously.

Automotive: US automotive sales could flatten, China macro outlook uncertain

In our initiation piece, we pointed to the low oil price, cheap financing, and an improving labor market in the US. While the drivers of growth in the automotive market are still intact, we look to more muted US growth after a record year as the industry enters its 7th year of expansion. We continue to forecast a year of strong US sales for 2016; our revised base case is flat over 2015 numbers, as opposed to mid to high single-digit growth.

In China, new car sales rose 9.3% YoY last month as a strong demand for SUVs offset a decline in sales of sedans. Yet in light of continued macroeconomic uncertainties, we continue to wait for more data points before making a judgment on the yearly trend. Given these ongoing concerns, we adjust our forecasts for FY16 automotive segment revenue growth to 8.8% YoY from 12.9% previously.

Continued strength as a new player in town

While these industry headwinds are expected to put a mild damper on Memtech’s earnings for FY15 and FY16, the group’s position as a new, competitive entrant in industries undergoing remains a key positive in our investment thesis. Revenue is expected to come in at US$144.1m in FY15 and US$156.0m in FY16.

Furthermore, we note that Memtech has been paying dividends consistently since listing, even during its lossmaking years in 2012 and 2013. After adjusting both for the 5-to-1 share consolidation in January, our fair value comes to S$0.72 from our previous estimate of S$0.79. Following the 14% increase in share price to S$0.615, we downgrade to a HOLD rating.

Source: OCBC Research - 22 Feb 2016