2QFY20 Beat; Maintain BUY

• Amid the US-China trade war and loss of smart-lighting allocation, VALUETRONICS (SGX:BN2)'s 2QFY20 core PATMI was ahead of our and consensus estimates, falling only 3% y-o-y, while revenue stayed flat.
• 1HFY20 accounted for 58-59% our/ consensus FY20E PATMI forecasts. Diversification efforts in Vietnam are progressing well.
• Valuetronics also raised interim DPS. See Valuetronics Dividend History.
• We raise FY20-22E EPS by 2-6% to reflect this set of results. See attached PDF report for details of the revision. ROE-g/COE-g Target Price is raised to SGD0.98, based on 2x FY20E P/B (prev: 1.9x). See Valuetronics Share Price; Valuetronics Target Price.
• Further loss of allocation would be a key risk, and growth resumption would be a rerating catalyst. Maintain BUY.

Margins Are Still Resilient

• Revenue inched down by 0.5% y-o-y, as an 8% decrease in ICE revenue was offset by a 10% gain in the CE segment. See Valuetronics Announcements.
• CE growth was from a low base, as last year, production was disrupted by flash flooding caused by Typhoon Mangkhut.
• ICE’s decline was broad-based, amid the trade-war.
• GPM of 15% (+0.1ppt y-o-y) was stable due to increased efficiency and resilient pricing, even though 40% of revenue was affected by tariffs, up from 25% previously.

Vietnam Expansion Progressing as Planned

• Valuetronics is planning to lease another factory (floor area 4,000 sqm) to ramp-up its integrated manufacturing capability by 1QCY20 to cater for urgent customer demand.
• Valuetronics is further planning to develop its own Vietnam campus in two phases. Construction of the first phase is expected to complete in 1HCY21. We understand customers are already in discussion with Valuetronics on potentially leveraging its Vietnam facilities for newer generations of products down the road.

Interim DPS Raised

• Valuetronics’s increased interim DPS of HKD6cts (1HFY19: HKD5cts) was a positive surprise. See Valuetronics Dividend History. This may signal management’s
  1. willingness to maintain/ increase absolute DPS levels; and
  2. confidence in the business.
• Valuetronics continues to be highly cash generative, with a cash position of HKD1b (+29% y-o-y). This will allow Valuetronics to comfortably fund dividends and Vietnam expansion through internal resources, in our view.

Source: Maybank Kim Eng Research - 13 Nov 2019