Resilient 1Q19; Expanding to Vietnam

• VALUETRONICS HOLDINGS LIMITED (SGX:BN2)'s 1Q19 PATMI fell 3% y-o-y due to soft demand across Valuetronics’s customers but was in-line with our est. and slightly ahead of consensus.
• We trim FY20- 21E EPS by 4-7% out of caution to factor in reduced visibility from Valuetronics’s customers. Valuetronics plans to invest further in Vietnam to offer refuge for Chinese customers impacted by US tariffs, which should support long-term earnings growth and the 6-7% dividend yield provides share price support.
• Maintain BUY with lower ROE-g/COE-g Target Price of SGD0.94 (1.9x FY20E P/B from 2x previously).
• Loss of customers/ allocation is a key risk.

Pricing Stable, Although Caution Drags Revenue

• Revenue fell 7% y-o-y led by a 10% decline in consumer electronics revenue due to the loss of the US allocation from its smart-lighting customer. Industrial and commercial electronics fell 5% due to softness across customers, although its customer base was maintained.
• GPM of 15.1% (+0.5ppt y-o-y) reflects a better product mix, improved efficiency and stable pricing.

Vietnam Could Drive Longer-term Growth

• Mass production and shipments to the US from its leased Vietnam site have begun. This has sparked increased customer interest to explore manufacturing out of Vietnam. Valuetronics may lease more space in the near term, and also plans to build its own manufacturing campus in Vietnam.
• Longer term, we see Valuetronics tilting the focus of its China plants towards non-US shipments, whilst growing Vietnam contributions. Around 20-25% of Valuetronics’s revenues are currently affected by 25% tariffs. If the 10% wave goes through, up to 45% of Valuetronics’s revenues will be affected.

Dividend Yields Still Attractive

• We see Valuetronics’s strong cash generation and balance sheet underpinning its 6-7% FY20-22E dividend yields. We see a resumption of earnings growth as a rerating catalyst for the stock, as this could alleviate concerns arising from:
  1. potential loss of customers/ allocation; and
  2. weak end-market demand.

Forecast Changes

• We trim FY20-22 EPS by 4-7% after factoring in a more conservative revenue outlook due to reduced visibility across Valuetronics’s customer base, as well as increased D&A expenses from Valuetronics’s Vietnam expansion. According to Valuetronics, 2QFY19E earnings should still be stable q-o-q based on present orders.
• Having factored in HKD70m-120m p.a. of capex across FY20-22 to account for expansion needs in Vietnam, we believe Valuetronics’s decent cash generation and strong balance sheet should still comfortably fund its 6-7% dividend yields.
• Our ROE-g/COE-g Target Price of SGD0.94 is based on 1.9x FY20E P/B, which is in turn based on FY20-22E average adjusted ROE of 18.4%, COE of 10.7%, and LTG of 2%. We used average adjusted ROE of 18.4% in favour of average FY20-22E ROE of 14.9% as we believe Valuetronics’s ROEs are “under-reflected” due to its massive cash hoard, which accounts for around 65% of its market cap. Our FY20-22E average adjusted ROE assumes that HKD400m is invested in FY20E, earning 10% ROEs pa.
• In our view, HKD400m is a reasonable quantum for strategic investments as it would leave ample room for working capital. Similarly, we believe a 10% ROE expectation is conservative and should factor in the timing and return uncertainties of new investments.

Source: Maybank Kim Eng Research - 16 Aug 2019