• Stay NEUTRAL, DCF-based Target Price of SGD0.61 implies 2% downside.
• VALUETRONICS (SGX:BN2)’s 1QFY20 (Mar) PATMI of HKD48.1m (-3.1% y-o-y) is in line with our estimate. With the US-China trade war still in effect, the current tariff rates could impact FY20F revenue by 20-25%. We estimate that capex of HKD150m would likely be needed for its Vietnam factory.
• The consumer electronics and industrial & commercial electronics divisions will also continue to weaken in FY20, especially its smart lighting segment.

Trade War Affecting Sentiment, Causing Lower Orders

• As Valuetronics’ factories are all in China, we believe the ongoing trade war and increase in tariffs will continue to impact its performance negatively – 20-25% of revenue will be affected by the higher tariff rates. While the company is still exploring options to set up a factory in Vietnam, we estimate that about HKD150m of capex will likely be needed over the next two years, just for this facility.
• There will also likely be a drop in orders, due to the transition. In addition, the trade war has caused customers to delay or pare down orders on negative sentiment as well as more tepid economic conditions. As such, we expect revenue to continue softening in the subsequent quarters.

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 on Tough Quarters Ahead

• We maintain our call and target price as earnings are in line and net cash is now equivalent to > 60% of its market cap.
• Management is keen to continue rewarding shareholders with respectable dividends, due to its strong net cash position and cash flow generation. It also declared a full-year DPS of HKD0.25 in FY19, representing a 6% yield at current share price levels. See Valuetronics share price and Valuetronics' dividend history.
• M&As are also a possibility, as management is exploring opportunities to deploy its cash to yield-accretive targets with synergistic businesses.
• 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 - 16 Aug 2019