• Valuetronics (SGX:BN2) announced it will submit an application to resume production of its factories in Huizhou, Guangdong province. It has also issued a notice to customers on potential delays to the original scheduled shipments. As a result, we think that there will likely be negative impact to earnings in 4QFY20F, and we lower our FY20F EPS by 8% to account for this.

COVID-19 Outbreak Impact

• Since the COVID-19 outbreak in China, a number of provinces and municipalities in the country have taken emergency public health measures and adopted various strict protocols to curb the spread of the outbreak. Provincial Governments issued notices extending the Lunar New Year holiday and imposed various orders to keep people at home in an effort to contain the spread of COVID-19.
• Valuetronics has also initiated its corporate prevention and containment contingency plan against the outbreak by closely tracking the health status and travel history of its employees.

Potential Shipment Delays

• We understand that the factory had closed a few days before the Lunar New Year and was supposed to resume production on the second week of February. As a result, we think that there may likely be a total of 1-1.5months of downtime, depending on when the Government gives the approval to resume production.
• Labour should also be a potential issue, coupled with supply chain delays. Valuetronics’ subsidiaries have also issued notices to their customers on potential delays to the original scheduled shipments. Although these delays are caused by an event beyond the group’s control, it will endeavour to meet the original shipment schedules as much as possible.

Need to Play Catch Up

• With an anticipated total downtime of 1-1.5 months, coupled like headwinds like labour and potential supply chain issues, we downgrade our FY20F (Mar) EPS by 8%. Further widespread of COVID-19 should also impact the group as well as the global economy. Hence a downgrade to NEUTRAL is appropriate at this time while waiting for further clarity of the issues at hand. Target Price SGD0.76.
• Key downside risks are an economic slowdown, FX risks, raw material price fluctuations, and further earnings downside if the trade war or virus outbreak escalates.

Source: RHB Invest Research - 18 Feb 2020