Valuetronics generated HK$76.1m in net operating cashflows

Fair Value S$0.31


3QFY12 earnings above expectations.
Valuetronics Holdings Limited (VHL) reported 3QFY12 earnings which exceeded our expectations. Revenue of HK$617.2m represented a 17.7% YoY increase but a 1.6% QoQ decline. Net profit was flat at HK$31.5m versus HK$31.6m in 3QFY11 but rose 9.5% QoQ. Adjusting for forex and one-off items, we estimate that core net profit for 3QFY12 would instead have declined 13.8% YoY (but increased 24.1% QoQ), and is still higher than our expectations. For 9MFY12, revenue increased 23.1% to HK$1.8b, meeting 76.6% of our full-year projections; while reported net profit declined 1.3% to HK$91.9m and formed 78.7% of our FY12 estimates.

OEM segment the main revenue driver.
VHL’s healthy revenue growth was due to a strong 24.3% YoY boost in its OEM segment and 84.5% YoY surge in its Licensing business, although the latter only formed
1.6% of overall sales in 3QFY12. The performance of its OEM segment was attributed largely to contribution from its largest customer, which more than buffered the slowdown in demand from some of its other major OEM customers and ODM segment. The latter saw a lacklustre 15.7% YoY decline in revenue for the reported quarter. This change in product mix resulted in a 1.8ppt YoY and 0.3ppt QoQ drop in overall gross margin to 13.6%.

Maintain BUY.
VHL generated HK$76.1m in net operating cashflows in 3QFY12 (compared to -HK$2.7m in the preceding year), placing it in a net cash position of HK$123.3m. Moving forward, management remains cautious on the uncertain macroeconomic landscape and rising cost pressures. But we expect strong contribution from its largest customer to continue, and believe that VHL can cope with rising cost pressures via constant efforts to improve its production efficiencies. We finetune our assumptions after taking into account this set of results, and roll forward our valuation on VHL to 5x FY13F EPS. Hence we derive a higher fair value estimate of S$0.31 (previously S$0.29). YTD, VHL’s share price has jumped 14.0%, but it is still only trading at 3.9x FY13F EPS and P/NTA of 0.9x, which is cheap in our opinion.

Improving US data bolsters optimism.
Despite continued economic risks emanating from US, as exhibited by the World Bank’s recent cut in its GDP growth forecast, improving data especially from the labour front and manufacturing sector has boosted optimism that the world’s largest economy would avoid a double-dip recession. Just last week, it was reported that the unemployment rate in US fell to 8.3%, the lowest level since Feb 2009. The 243k increase in nonfarm payrolls for Jan also beat market expectations, while the US ISM non-manufacturing index rose to 56.8 in Jan (versus 53.0 in Dec 2011). We believe this augurs well for the prospects of VHL, given that a number of its major customers are based in the US. In addition, its Licensing segment leverages on major US retailers, specialty and departmental stores for the sales of products such as air purifiers, heaters and fans to end consumers. While this division is still loss making, we reckon that it might possibly achieve operational breakeven by end FY13 or early FY14.

Company Background
The Company was incorporated in Bermuda on 18 August 2006. The Group is an integrated electronics manufacturing services (“EMS”) provider. Its principal business segments can be categorized as follows:-
(i) Provision of original equipment manufacturing (“OEM”) services including printed circuit board assembly and box-build assembly; and
(ii) Provision of original design manufacturing (“ODM”) services in the telecommunications, industrial and commercial electronic products and consumer electronic products industries.

Valuetronics' integrated manufacturing capabilities range from plastic tool frabication and injection molding, metal stamping and machining to SMT and finished product assembly on full turnkey basis. It is headquartered in Hong Kong and its manufacturing facilities are located in Danshui Town, Huiyang District, Huizhou City, Guangdong Province, China. The Group’s customers include OEMs and ODMs, as well as international brand owners such as AT&T, Dymo, GE, Graco, HID, Honeywell, KAZ, Kitchenaid, Motorola, NTT and Philips.