• Stay NEUTRAL, new DCF-based Target Price of SGD0.61 from SGD0.67, 2% downside.
• Valuetronics’ FY19 (Mar) PATMI of HKD199.5m (-2.6% y-o-y) is in line with our estimates.
• With the trade war still in effect, we understand that the current tariff rates could impact FY19F revenue by 20-25%. We estimate that capex of HKD150m would likely be needed for the Vietnam factory. The CE and ICE businesses will also likely weaken in FY20. Due to this, we trim Valuetronics’ FY20F earnings by 5%.

Trade War May Dampen Margins and Profitability

• As VALUETRONICS HOLDINGS LIMITED (SGX:BN2)’s factories are all in China, we think that the ongoing trade war and increase in tariffs will continue to impact it negatively, as 20-25% of revenue will be affected by the higher tariff rates. The company is working with a customer to shift production to Vietnam.
• We estimate about HKD150m of capex will likely be needed over the next two years, just for the Vietnam facility. There will also likely be a drop in orders, due to the transition.

Missing Out on US Orders for New-generation Smart Lighting

• Management said it has secured manufacturing orders for smart lighting products from the rest of the world except the US. We understand that US orders make up over 50% of its total smart lightning orders – this is quite significant, as smart lighting products account for 10-15% of topline as of 9MFY19. As a result, we expect revenue to be impacted by 9-11% from FY2020 onwards.
• On the consumer and household appliances front, management continues to see stable inflation-adjusted growth in its toothbrush and shaver segments.

Maintain NEUTRAL With More Headwinds Ahead

• We also cut Valuetronics’ FY20-21F PATMI by 5%, which results in a lower DCF-based Target Price of SGD0.61. We maintain our call, as we prefer to see how the trade war progresses.
• Management is keen to continue rewarding shareholders with respectable dividends, due to its strong net cash position and cash flow generation. Management also declared a full-year DPS of HKD0.25. See Valuetronics dividend history.
• Key downside risks are an economic slowdown, FX risks, raw material price fluctuations and further earnings downside if the trade war escalates.

Source: RHB Invest Research - 31 May 2019