Priced In; Maintain BUY

• Due to the Covid-19 outbreak in China, Valuetronics (SGX:BN2) is facing difficulties meeting originally planned delivery schedules. Valuetronics warns that this may result in 2HFY20 revenues to be lower y-o-y.
• We reduce FYMar20E EPS by 12% to factor delayed deliveries, but leave FY21-22E unchanged, as we believe longer-term fundamentals are intact.
• ROE-g/COE-g Target Price is reduced to SGD0.94, based on 1.9x FY20E P/B (prev: 2x).
• BUY for attractive dividend yields of 6-7% while awaiting growth to return.

Delay in Achieving Pre-CNY Production Levels

• Both of Valuetronics’s plants in Huizhou, Guangdong, estimated to account for more than 90% of normal production capacity, have resumed operations this week. However, various measures implemented to curb the Covid-19 outbreak in China, such as the shutdown of cities and limited transportation facilities, have delayed the return of some workers. This in turn will delay Valuetronics achieving pre-CNY production levels, hence affecting delivery timelines.

Longer-term Growth Drivers Intact

• Our FY21-22E forecasts are largely unchanged as we expect Valuetronics to resume normal production levels when all workers return. Furthermore, Valuetronics remains steadfast on expansion plans in Vietnam, a key long-term growth driver.
• We also expect Valuetronics’s products, such as smart-LED, in-car connectivity modules, and transaction printers, to resume growth once cyclical headwinds fizzle out.

Buy the Dips

• We continue to expect strong FCF in FY20E. Coupled with a robust balance sheet (cash accounting for 58% of market cap and no debt), we believe Valuetronics can still maintain FYMar19 DPS of HKD0.25cts, while still setting aside resources for Vietnam expansion plans (see Valuetronics Dividend History). This translates to an attractive 6% yield.
• Key risks to FYMar20E earnings are if
  1. we have underestimated effects of negative operating leverage; and/or
  2. Valuetronics has to compensate customers for any delivery delays.
• Further out, we believe the key risk is loss of allocation/ customers who want to diversify out of China, despite Valuetronics’s expansion plans in Vietnam.

Source: Maybank Kim Eng Research - 20 Feb 2020