Valuetronics Holdings (VALUE SP) - RHB Research … would expand the group’s overall margins and lift Valuetronics ... factory in China is a distance ... business. ICE’s revenue

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Initiating Coverage, 2 March 2015

Valuetronics (VALUE SP) Buy Technology - Technology Target Price: SGD0.64

Market Cap: USD122m Price: SGD0.44

Unearthing Its True Value

Macro

1.00

Risks

2.00

Growth

2.00

Value

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115

130

145

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190

205

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0.29

0.34

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0.44

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0.59

0.64

Valuetronics Holdings (VALUE SP)Price Close Relative to Straits Times Index (RHS)

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Source: Bloomberg

Avg Turnover (SGD/USD) 0.89m/0.66m

Cons. Upside (%) -2.3

Upside (%) 45

52-wk Price low/high (SGD) 0.28 - 0.59

Free float (%) 70

Share outstanding (m) 375

Shareholders (%)

Chong Hing Tse 18.4

Koh Kit Chow 7.7

Pyn Rahastoyhtio 4.7

Share Performance (%)

YTD 1m 3m 6m 12m

Absolute 23.9 22.2 14.3 (9.3) 54.4

Relative 21.7 21.0 11.6 (12.8) 43.0

Shariah compliant

Jarick Seet +65 6232 3891

[email protected]

Terence Wong CFA +65 6232 3896

[email protected]

Forecasts and Valuations Mar-13 Mar-14 Mar-15F Mar-16F Mar-17F

Total turnover (HKDm) 2,210 2,433 2,438 2,707 3,019

Reported net profit (HKDm) 79 148 142 164 191

Recurring net profit (HKDm) 79 148 142 164 191

Recurring net profit growth (%) (39.6) 88.0 (4.2) 15.8 16.3

Recurring EPS (HKD) 0.22 0.41 0.39 0.45 0.52

DPS (HKD) 0.20 0.20 0.19 0.22 0.23

Recurring P/E (x) 11.6 6.2 6.5 5.6 4.8

P/B (x) 1.54 1.27 1.16 1.04 0.92

P/CF (x) 15.4 3.0 5.4 4.9 4.2

Dividend Yield (%) 7.9 8.0 7.6 8.9 9.0

EV/EBITDA (x) 2.18 0.96 0.79 0.40 0.03

Return on average equity (%) 13.6 22.4 18.6 19.4 20.1

Net debt to equity (%) net cash net cash net cash net cash net cash

Our vs consensus EPS (adjusted) (%) 0.0 0.0 0.0

Source: Company data, OSK-DMG

We initiate coverage on Valuetronics, a manufacturer of both consumer and industrial electronic products with a BUY and a DCF-based TP of SGD0.64 (45% upside). Going forward, we expect its industrial and commercial electronics (ICE) segment with higher margins to continue to register strong growth. With its high 8+% dividend yield, net cash representing 56% of its market cap, strong cash generation and as it is trading at just 2.5x FY16 (Mar) ex-cash P/E, this stock is a clear bargain.

ICE segment to register strong growth. We expect the company’s

industrial and commercial electronics (ICE) segment to register 20% annual revenue growth over FY16-17, with gross margins staying above 19% as it diversifies and expands its customer base. Growth in this segment would expand the group’s overall margins and lift Valuetronics NPAT over the years.

High dividend yield of above 8%. As of FY14, management has officially set a formal dividend payout policy with a similar range of 30% to 50% of NPAT. We expect Valuetronics to consistently pay out above 40% of its NPAT going forward and potentially a special dividend if it manages to do well, like in FY14. This would result in a potential dividend yield range of 8-9%.

Successful listing of Phillips’ lighting business a positive. Phillips (PHIA, NA), which we suspect to be its largest customer, is now seeking to list and grow its lighting business – and we believe a successful listing will be a positive catalyst for Valuetronics.

Initiate coverage with BUY and a DCF-based TP of SGD0.64. With a net cash position making up 56% of its current market capitalisation, Valuetronics is effectively trading at only a bargain of 2.5x ex-cash FY16 P/E, coupled with a potential 8-9% dividend yield. We find that such a company with a strong balance sheet and a business generating a substantial amount of positive free cash flow has been deeply misunderstood and undervalued by the market. We initiate coverage with BUY. Our DCF-based TP of SGD0.64 implies a 45% potential upside.

http://www.efa.biz/

Valuetronics (VALUE SP)

2 March 2015

See important disclosures at the end of this report 2

Table Of Contents Table Of Contents .................................................................................................. 2 Investment Merits ................................................................................................... 3 Valuation ................................................................................................................ 8 Peer Comparison & Key Risks ................................................................................ 9 Industry Outlook ................................................................................................... 10 Financial Forecasts .............................................................................................. 13 Company Background .......................................................................................... 17 Business Analysis................................................................................................. 21 Financial Exhibits ................................................................................................. 25 SWOT Analysis .................................................................................................... 27 Recommendation Chart ........................................................................................ 28


2 March 2015


Investment Merits

Substantially undervalued at 2.5x ex-cash FY16 P/E. With a net cash position making up 56% of its current market capitalisation, Valuetronics is effectively trading at a bargain of 2.5x ex-cash FY16 P/E, coupled with a potential 8-9% dividend yield. With its strong balance sheet and a business generating a substantial amount of positive free cash flow, we find that the company has been deeply misunderstood and undervalued by the market.

Uncertainty solved - Phillips targets to list its lighting business in 2016. When Phillips announced in Sep 2014 that it was seeking to divest its lighting business, the market believed Phillips may shut down or scale down its lightning business greatly. Such a move would impact Valuetronics negatively, based on our projection that Phillips made up 56% of the latter’s FY14 revenue and is its single largest customer. Coupled with a short-sell report on over-pessimistic views, Valuetronics’ share price took a big hit and plunged 38% to SGD0.31 from SGD0.50. However, in Jan 2015, Phillips at its results announcement also indicated that it is seeking to divest its lighting arm – which is the world’s largest lighting business by sales – via an IPO in 2016. If the IPO is successful, this would be a big positive and a significant fundamental change for Valuetronics’ business prospects – and could erase the initial worries of lower contributions from Phillips. Instead, we expect orders to increase from the soon-to-be-listed lighting division and margins to increase for Valuetronics’ CE division from FY16 onwards.

Figure 1: Valuetronics' share price performance

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ICE segment has no single largest customer. Unlike its CE segment that has Phillips as its single largest customer, the company’s management is aware of a single customer risk and has subsequently made sure that its ICE segment has contributions from a range of 20 different customers, with none accounting for more than 20% of revenue from that division.

Potential to work with new partners. We expect Valuetronics to continue to expand its customer base and work with new partners with new products that will allow it to maintain or improve its margins on the ICE front.


2 March 2015


Dedicated and experienced management team. Mr Tse Chong Hing is the chairman and MD of Valuetronics, with over 25 years of experience in finance and operations management in the electronics manufacturing industry. The company’s key management team consists of its senior business unit managers, who have at least 20 years of experience each in this field. In addition, we discovered that as its factory in China is a distance away from the city area, the key management team members including Mr Tse, usually stay near the factory on weekdays and only return to see their families on the weekends – showing their deep dedication to the company.

Exceptional operating cash flow. Valuetronics’ business model has enabled it to generate a healthy level of cash flow from operating activities throughout the past few years, especially in a stable business environment. Going forward, both we and the management do not expect capex to be significant in the next few years. Management expects capex to be in the range of HKD40m-50m for maintenance and the addition of machineries for business expansion.

Figure 2: Net cash from operating activities (HKDm)

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Source: OSK-DMG estimates

HKD appreciating against SGD. Since Jul 2014, the HKD has been appreciating against the SGD. The SGD/HKD rate has declined 8.6% to HKD5.73 for every SGD currently from HKD6.27 in Jul 2014. Our house view is SGD could weaken further to HKD5.66 until the end of 2015. This would imply a total 10% decline since Jul 2014 if it reaches our house’s target. This would also be extremely beneficial to Valuetronics’ investors – revenues and profits are denominated in HKD while dividends are paid out in SGD. As a result, a dividend bump can be expected for this financial year, even if the payout ratio remains the same.

Figure 3: SGD/HKD exchange rate

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Source: Bloomberg


2 March 2015


ICE has better margins that are growing rapidly. Due to the declining margins (which are industry-wide) for its CE unit, the management of Valuetronics has begun expanding its ICE segment – which focuses more on industrial and commercial products – to help mitigate any potential slowdown or margin decline in its CE business. ICE’s revenue contribution has been growing rapidly from just HKD216.1m in FY10 to HKD780m in FY14. The margins for this segment have also improved significantly to 19% as of FY14 from a mere 14% in FY12. We expect revenue growth from this segment to continue to rise above 10% a year due to existing customers coming out with new products as well as gaining new customers, with margins maintained at a minimum of 19% going forward. This could help to lift the group’s overall margins and net profit as the gross margin for CE was just 9% as of FY14.

Figure 4: Segmental gross margins (%)

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17%

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Industrial and Commercial Electronics (ODM) (%)

Consumer Electronics (OEM) (%)

Overall (%)


Figure 5: Revenue breakdown

Revenue breakdown FY10 FY11 FY12 FY13 FY14 FY15F FY16F FY17F

Consumer Electronics (OEM) 67% 64% 71% 71% 68% 60% 56% 53%

Industrial and Commercial Electronics (ODM) 33% 34% 25% 28% 32% 40% 44% 47%

Licensing (discontinued in 2013) 0% 2% 4% 1% 0% 0% 0% 0% Source: OSK-DMG estimates

Figure 6: Revenue breakdown

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Industrial and Commercial Electronics (ODM)

Licensing (discontinued in 2013)

Consumer Electronics (OEM)



2 March 2015


Strong balance sheet. As of 3QFY15, Valuetronics had a strong balance sheet with no debt and a net cash position of HKD510m. In fact, the company has been debt-free for the majority of its history since its listing – except in FY11 and FY12 due to increased expenditures for new equipments. Despite that, it was still in a positive net cash position due to its strong cash flow from operations.

Figure 7: Valuetronics’ net cash position (FY10-17F)

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56% of market cap made up of net cash. Due to its positive free cash flow from its operations, Valuetronics has been substantially adding to its cash pile despite paying out 30-50% of its NPAT. As of 3QFY15, it had a net cash position of HKD510m, and a current market capitalisation of HKD910m as of 26 Feb 2015 – which means that more than half of Valuetronics’ market value is made up of net cash.

Figure 8: Net cash position as of 3Q15

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56%

Market Cap

Market Cap - 910 HKDm Net Cash - 510 HKDm

Source: Company data

Potential special dividend. With a net cash pile of HKD510m, we believe that there is a high possibility that management will be keen to reward shareholders with a special dividend like what it did in FY14 – provided that the business is doing generally well with no significant decline in earnings. In addition, it has no concrete M&A plans as of this moment, which would likely increase the possibility of the company paying out a special dividend.


2 March 2015


A dividend machine offering an 8-9% yield. Since its IPO in 2007 and despite not having a fixed dividend policy previously, the management of Valuetronics places emphasis on rewarding its shareholders by paying out 30% to 50% of its NPAT, which reflects a 7-8% yield based on its current share price. In FY14, management officially set a formal dividend payout policy, and rewarded investors with 30-50% of its NPAT. We expect the company to consistently pay out above 40% of its NPAT going forward – on top of special dividends if it manages to perform well, like in FY14. This would result in a potential dividend yield range of 8-9% alone in FY16, based on its current share price of SGD0.43, excluding any special dividends.

Figure 9: Valuetronics’ dividend yield (%)

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0.235 0.23 0.205

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Share Price (SGD) Dividend Yield (%)

Source: OSK-DMG estimates and Company Data

Figure 10: Valuetronics’ dividend payout ratios (%)

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Source: OSK-DMG estimates and Company Data


2 March 2015


Valuation Initiating coverage with a BUY call and an SGD0.64 TP

DCF-derived TP of SGD0.64, with 12% WACC. We initiate coverage on Valuetronics with a BUY recommendation and a TP of SGD0.64, based on a DCF valuation and the assumptions listed below. Our TP for Valuetronics is SGD0.64, representing a 45% potential upside from its current price of SGD0.43.

i. We apply a risk-free rate of 2.5% from the 10-year average yield of the 10-year Singapore Government bond

ii. Expected market return is 10%, based on Bloomberg’s 10‐year average return of the Singapore market

iii. Beta of 0.95

iv. Our terminal growth rate is 0%

Figure 11: Valuetronics' DCF valuation

HKD(m) Total FY16F FY17F FY18F FY19F FY20F FY21F FY22F Terminal Value

EBIT 183 213 215 75 84 84 100

EBIT(1-T) 165 191 193 67 75 76 90

Less: Capex -45 -45 -60 -60 -60 -60 -60

Add: Depreciation & Amortisation 32 34 36 40 43 46 49

Less: Change in Non-cash WC -6 -7 -1 10 -1 -1 -2

FCFF 158 188 170 38 60 63 80 668

Present value of FCFF 141 150 121 24 34 32 36 302

Total FCFF 839

Add : Cash (with IPO proceeds) 510

Less: Value of Debt 0

Target Equity Value 1349

No.of shares 366

HKD/SGD rate 5.7

Intrinsic Share Price SGD 0.64

Beta 0.95

Risk free rate 2.5%

Market risk premium 10%

Tax rate 10%

Gearing 0%

Cost of debt 0%

LT growth 0%

WACC 12.3% Source: OSK-DMG estimates

2.5x FY16 ex-cash P/E with a 9% yield. At its current price levels, Valuetronics is only trading at 5.6x FY16 P/E. With a net huge cash hoard of HKD510m, representing 56% of its market cap, it is effectively only trading at 2.5x FY16 ex-cash P/E, coupled with a potential 8-9% dividend yield – which is a bargain. In our view, for a company that has such a strong balance sheet and generates a substantial amount of positive free cash flow, its current price level is just too cheap to ignore.


2 March 2015


Peer Comparison

Trading at a significant discount to its peers. We compare Valuetronics to its global manufacturing peers and component makers and discovered that Valuetronics is still trading at a significant discount at just 6.5x FY15 P/E compared to the peer average of 14.7x. In addition, its net cash position representing 56% of its current market capitalisation is much higher than that of its peers as well.

We do take note that its global peers are significantly larger than Valuetronics in terms of market capitalisation, but an undemanding valuation of 2.9x FY15 ex cash P/E may suggest that it is too undervalued at current price levels. In addition, its dividend yield of 7.6% for FY15F is also significantly higher than those of its peers, with some not even distributing any dividend to its shareholders.

Figure 12: Peer comparison

Name Ticker Mkt Cap (SGD) FY15 P/E (x) FY15 P/B (x) Net Gearing (%) FY15 ROE (%) Dividend Yield (%)

VALUETRONICS HOLDINGS LTD* VALUE SP Equity 165 6.5 1.2 -56.0 18.6 7.6

HON HAI PRECISION INDUSTRY 2317 TT Equity 55,541 11.2 1.5 -17.2 14.3 2.4

FLEXTRONICS INTL LTD FLEX US Equity 9,552 14.4 3.0 16.1 18.9 N/A

CELESTICA INC CLS CN Equity 2,804 16.1 1.3 -40.5 10.9 N/A

VENTURE CORP LTD VMS SP Equity 2,223 16.0 1.2 -9.2 8.7 6.3

CAL-COMP ELECTRONICS THAILAN CCET TB Equity 704 15.7 1.0 123.8 N/A 4.8

Average 14.7 1.6 14.6 13.2 4.5 Source: Bloomberg & OSK-DMG estimates *OSK-DMG estimate Price close as of 27 Feb 2015

Key Risks Customer concentration risk. Valuetronics faces a customer concentration risk as its largest customer – a Dutch lighting and consumer electronics conglomerate which we know to be Phillips – accounts for 60% of its revenue and 50% of gross profit. Any significant slowdown in Phillips’ earnings would have a direct impact on Valuetronics’ earnings. Cheaper LED versions from China factories. Currently, the ongoing trend is that premium LED lighting brands with better-quality products are being undercut by Chinese products, which have a much cheaper cost of production and selling prices that are 20-30% lower. As a result, Valuetronics’ customers have had to cut their selling prices – which may put downward pressure on Valuetronics’ margins.


2 March 2015


Industry Outlook Surge in LED penetration rate. According to Statista, more countries are getting close to phasing out conventional bulbs, with LEDs continuing their march to the top of the market. The global lighting market can be broken down into three main segments: general lighting, automotive lighting and backlighting. At an estimated market size of around USD73bn, general lighting was the largest segment in 2011. It is expected to exceed USD100bn by 2020, while the automotive lighting market is expected to rake in revenues of just under USD25bn in 2020, thus accounting for almost 20% of total market revenue. In the backlighting segment, revenue growth is anticipated to stagnate due to the increased use of organic light-emitting diode (OLED) technologies. The market share of OLEDs in smartphone and television displays is set to experience accelerated growth at the expense of LED and liquid crystal displays.

Figure 13: Estimated LED penetration of the global lighting market (2010-2020)

Source: Statista

Figure 14: LED market share is expected to surge

Source: McKinsey


2 March 2015


Regulations favouring energy efficient light sources. According to McKinsey, regulations are in favour of efficient light sources as well as falling LED prices. Over the years, regulations globally have become more favourable towards energy-efficient light sources. For example, Europe is further accelerating the switchover to more ecological lighting sources by extending its regulations to ban low-voltage halogen lamps. Meanwhile, China recently amended a proclamation to ban incandescent light bulbs. Next, the EU has ruled that by 2020, all new building structures should consume “nearly zero” energy. In addition, within the US, the newly-introduced international green construction code is being adopted by an ever greater number of local jurisdictions.

Figure 15: Regulations favouring efficient energy sources

Source: McKinsey

Shift away from nuclear energy. After the nuclear disaster in Japan 2011, there was a shift away from nuclear energy around the world, especially in Japan and Germany, where eight out of 17 nuclear power stations were shut down. This shift accelerated the demand and transition to efficient light sources like LEDs.

Figure 16: Shifting away from nuclear power

Source: McKinsey


2 March 2015


LED prices eroding. According to McKinsey, LED prices have eroded aggressively, pulling forward the payback time of LED lightning. The inflection point for LED retrofit bulbs in the residential segment is now likely to be around 2015. McKinsey expects LED share in general lighting to surge to 45% in 2016 and 70% in 2020.

Figure 17: Price erosion in Germany

Source: McKinsey TCO = total cost of ownership model

Figure 18: LED package forecast prices have seen accelerated reduction

Source: McKinsey


2 March 2015


Financial Forecasts A blip in 2015 for CE. We expect 2015 to be a blip for Valuetronics’ CE business with a decline in contribution due to a slowdown in orders from its single largest major customer, Phillips. Phillips announced in Sep 2014 that it planned to divest its lightning business. The uncertainty of the business going forward has affected Valuetronics and contributed to a 10% YoY decline in revenue on the CE front in FY15. Phillips has clarified that it is seeking to list its lighting business in FY16. If the listing is successful, we believe that it would benefit Valuetronics as any expansion with new funds raised from the market will likely result in Valuetronics getting more orders from Phillips, resulting in increased contribution from its CE segment. Given our conservative stance partly due to the challenging outlook, we forecast a minimal 5% revenue growth each in FY16 and FY17. Margins likely to have hit rock bottom. Due to intense competition from its Chinese counterparts which enjoy much cheaper costs (about 20-30% lower), Phillips has reduced selling prices of its products, which has adversely impacted Valuetronics as well. Gross margins for its CE segment have decreased to 9% in 3QFY15 from 13% in FY12. However, we expect margins to stay around these levels as management has highlighted that it will not continue an unprofitable business and will allocate capacity instead to its ICE business if CE margins continue to decline. In addition, Phillips will not likely decrease its prices further as it wants to remain in the premium category for lighting products. It is determined not to sacrifice the quality of its products by cutting costs or selling prices.

Figure 19: CE's revenue contribution forecast and gross margins

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2 March 2015


ICE growth to remain strong. We expect its ICE segment to continue to grow strongly over the next few years as the company is actively seeking new customers. In addition, its existing customers are also launching and expanding their own product ranges. Management has been successful in expanding this segment rapidly without sacrificing any margins, with revenue contribution increasing to HKD780m in FY14 from HKD377.3m in FY10. In fact, gross margins have improved tremendously despite market share rising to 19% as of FY14 from 14% just two years ago. Given our more conservative stance, we forecast margins for this segment to stay at around the 19% level going forward (Figure 20). ICE segment may buffer any weakness in CE. Looking ahead, we expect the strong growth and margins from its ICE segment to make up for any potential weakness or decline in its CE segment. It would actually be ideal for Valuetronics to shift its capacity from CE to ICE gradually as the latter yields significantly better margins than the former (19% vs 9%).

Figure 20: ICE's revenue contribution forecast and gross margins

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2 March 2015


NPAT set to grow steadily from FY16 onwards. While Valuetronics’ FY15 performance was impacted by uncertainty arising from its single largest customer divesting its business, we think that this situation could be solved in FY16 if Phillips successfully lists its lighting business. This will provide a clearer and more beneficial situation for Valuetronics, potentially boosting its earnings growth. We expect recurring NPAT to grow steadily at 16% YoY from FY16 onwards, contributed by more stable contribution from its CE segment and strong growth from its ICE segment. Improving margins and contribution from its ICE segment will also help to improve overall gross and net margins going forward.

Figure 21: Valuetronics’ NPAT growth

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Figure 22: Valuetronics' gross and net profit margins

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2 March 2015


Cash-generating machine. Valuetronics’ business model has enabled it to generate a healthy level of cash flow from operating activities throughout the past few years, especially in a stable business environment. Going forward, no significant capex is expected in the next few years. Management expects capex to be in the range of HKD40m-50m for maintenance and the addition of more machines for business expansion.

Figure 23: Net cash from operating activities and capex (HKDm)

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2 March 2015


Company Background

From a humble beginning. Established in 1992, Valuetronics Holdings Ltd, formerly incorporated as Honor Tone Ltd, is a Hong Kong-based holding company involved in the integrated electronics manufacturing services (EMS) business. The company started out with a manufacturing facility in the Guangdong province and has expanded its production into Daya Bay and Shenzhen. In 2003, it was accredited with ISO 9001-2000, a testament to its ability to maintain high standards in its products. In 2007, Valuetronics was listed on the SGX-Mainboard, with its newest facility in Daya Bay spanning more than 110,000 sq m. By 2008, it became a key supplier for the world’s biggest lighting multinational corporation (MNC), which we believe to be Phillips.

Figure 24: Daya Bay facility

Source: Company


2 March 2015


Key manufacturer of electronic products. Valuetronics is responsible for the manufacture of electronic products in the consumer and industrial segments. In some instances, Valuetronics is also employed for its ability to design some electronics such as cordless phones and thermal label printers. For a notable customer, which we believe to be Phillips, it manufactures LED light bulbs and the printed circuit board assembly (PCBA) for Phillips’ electric toothbrushes and shavers. It is also the Dutch consumer electronics company’s preferred supplier in its consumer lifestyle and lighting segment. In 2010, it entered into the licensing business, but the business was discontinued in 2013 due to its inability to generate profits in this segment.

Figure 25: Valuetronics’ key milestones

Source: Company

Two main businesses. Valuetronics has two main businesses which are its earnings growth drivers, namely: i) CE and ii) ICE. It specialises in PCBA product assemblies and for electrical products at both the consumer and industrial level. Its expertise in manufacturing, using techniques such as injection moulding and metal part machining is complemented by its design capabilities, which include mechanical and electrical engineering and software development. These allow the company to provide an integrated full spectrum of services to its customers. In addition, it is able to accomodate customers’ requirements for various volumes, mixes and complexity. It has a large customer base ranging from emerging enterprises in Northern America (low-volume complex custom products) to top global MNCs (high-volume standard products).


2 March 2015


Figure 26: Valuetronics’ business model

Source: Company

Figure 27: Valuetronics’ worldwide offices

Source: Company

Experienced management team. Mr Tse Chong Hing is the chairman and managing director of Valuetronics with over 25 years of experience in finance and operations management in the electronics manufacturing industry. Mr Wong, who is the director of its plastics division, has over 35 years of experience in plastic injection moulding. Together with the other key management team, they have successfully led Valuetronics through different business cycles and revolutionary changes in the business, like the creation and expansion of its new ICE segment.


2 March 2015


Figure 28: Key management team


Figure 29: Board of directors

Name Position Experience

Mr Tse Chong Hing Chairman and Managing Director Tse Chong Hing is the Chairman and Managing Director of our Company. He joined in November 1996 as the

Assistant to the then Managing Director. He is responsible for strategic planning and the general management

of Valuetronics. Mr Tse has over 25 years of experience in finance and operations management in the

electronics manufacturing industry.

Mr Chow Kok Kit Executive Director Chow Kok Kit is one of the founders and an Executive Director of our Company. He is responsible for the

design and development (“D&D”) as well as purchasing functions for Valuetronics. Mr Chow has over 25 years

of experience in the electronics manufacturing industry.

Mr Chow Kok Kee Lead Independent Director Chow Kok Kee was appointed as the Lead Independent Director of the Company on 6 February 2007. Mr Chow

is currently the Managing Director of ACTA Investment & Services Pte Ltd, and also sits on the Boards of

Chosen Holdings Ltd, Tuan Sing Holdings Ltd and M1 Ltd. He was Director of Meiban Group Ltd and Innovalues

Ltd, in the last three years.

Mr Ong Tiew Siam Independent Director Ong Tiew Siam has more than 34 years of experience in finance, accounting and administration in various

industries. He also sits on the board of several companies listed on the SGX-ST.

Ms Tan Siok Chin Non-Executive Director Tan Siok Chin is an Advocate and Solicitor of the Supreme Court of Singapore and a Director of ACIES Law

Corporation. Ms Tan has over 20 years of experience in legal practice. Source: Company data

Figure 30: Valuetronics’ shareholders proportions


Name Position Experience

Mr Wong Hing Kwai Director, Plastics Division Wong Hing Kwai is Director of the Plastics Division. He is responsible for the overall management of Plastics Division. Mr Wong has over 35 years of experience in plastic injection moulding and holds a Bachelor of Engineering degree from Shanghai Jiao Tong University, PRC.

Mr Ho Yam Hin General Manager, Plastics Division Ho Yam Hin is the General Manager of the Plastics Division and he joined in March 2000. He assists Mr Wong Hing Kwai in the overall management of Plastics Division, including Metal and Mold Shops. Mr Ho has over 25 years of experience in plastic injection moulding.

Mr Huang Jian Yuan Vice President, Operations Huang Jian Yuan joined in September 2007 as Operations Manager and promoted to Vice President, Operations in April 2012. He oversees the 2 sites of factory operations. Mr Huang has more than 20 years of experience in program and operation management.

Mr Loic Meston Vice President, Business Development

Loic Meston is the Vice President of Business Development. He joined in October 2003. He is responsible for the business development activities, customer support for USA and Europe, and provides the D&D team with market analysis on product trends and regulatory requirements. He has over 20 years of experience in sales, marketing and product development.

Mr Peter lau Tak Wah Senior Business Unit Manager Peter Lau is the Senior Business Unit Manager. He joined in September 2004. He is responsible for the overall business management for one of the business units and has over 20 years of experience in Customer Program Management.

Mr Bruce Yip Chu Leung Senior Business Unit Manager Bruce Yip is a Senior Business Unit Manager. He joined in September 2009. He is responsible for the overall business management for one of the business units and has over 20 years of experience in program management and business development.

Mr Joseph Lui Ka Ho Group Financial Controller Joseph Lui joined as Financial Controller in 2012 and was promoted to Group Financial Controller in November 2013. Mr Lui oversees the company’s finance and accounting functions.


2 March 2015


Business Analysis Consumer electronics (CE)

Manufacturing a wide range of consumer products. The CE segment of Valuetronics is dominated by Dutch electrical company Phillips, which employs Valuetronics for the manufacture of LED light bulbs as well as other electrical personal care products like electric toothbrushes and shavers. The growth of this segment is partly driven by the increasing awareness among consumers regarding environmental consciousness. As LED light bulbs are marketed as energy saving compared with traditional light bulbs, this has led to steady growth of LED bulbs sales, and as a result, constant growth in the CE segment of Valuetronics.

i. Shavers ii. Energy saving luminaries iii. Video and digital baby monitors iv. LED lamps v. Electronic toothbrushes vi. Bug zappers

Figure 31: Energy saving luminaries

Source: Company

Figure 32: PCBA for shavers & electric toothbrushes for consumer use

Source: Company


2 March 2015


Figure 33: Video/digital baby monitors and bug zappers

Source: Company

Declining contribution from CE. As of FY14, CE contributes about 68% of the total revenue to Valuetronics. However, we expect contributions from CE to decrease with the rapid growth in contribution from its ICE division. As ICE’s segmental gross margins are much higher than that of CE’s, this will help overall gross margins for Valuetronics to increase gradually.

Figure 34: Segmental revenue breakdown from FY12-FY17F

Title:

Source:


71% 71% 68% 60% 56% 53%

25% 28% 32% 40% 44% 47%

4% 1% 0% 0% 0% 0%

0%

20%

40%

60%

80%

100%

120%


Consumer Electronics (OEM)

Industrial and Commercial Electronics (ODM)

Licensing (discontinued in 2013)



2 March 2015


Industrial and commercial electronics (ICE)

Rapidly expanding since FY10. Unlike the CE segment, the ICE segment is not dominated by any one customer. Instead, the ICE customer base is spread out among a range of 20 companies, driven by demand for products such as access card readers, thermal label printers and high-precision industrial grade GPS. Revenue contribution and gross margins have been rapidly improving since ICE was introduced a few years ago. ICE contributed just HKD377m to its FY10 topline and that has grown rapidly to HKD780m in FY14. Even as of 3Q15, revenue growth from the ICE segment is still surging at 28% YoY.

i. Transaction printer for slot, point-of-sale (POS) ii. Thermal label printer iii. Access card readers iv. In-vitro diagnostic medical equipment v. High precision GPS vi. Temperature monitor

Figure 35: Examples of industrial products

Source: Company

Figure 36: Transaction and thermal label printers and other products

Source: Company


2 March 2015


Margins improving to 19% from 7%. Margins for the ICE segment have also improved tremendously to 19% as of FY14 from just 14% in FY12 (Figure 38), as the revenue contribution from this business segment has surged in just four years (see Figure 37).

Figure 37: Industrial and commercial electronics (HKDm)

Title:

Source:


377.3

673.3604.7 628.8

779.9

982.7

1179.2

1415.1

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0


Industrial and Commercial Electronics (HKDm)


Figure 38: Industrial and commercial electronics gross margins (%)

Title:

Source:


14%

17%

19% 19% 19% 19%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%


Industrial and Commercial Electronics gross margins (%)



2 March 2015


Financial Exhibits

Profit & Loss (HKDm) Mar-13 Mar-14 Mar-15F Mar-16F Mar-17F

Total turnover 2,210 2,433 2,438 2,707 3,019

Cost of sales (1,940) (2,106) (2,120) (2,345) (2,606)

Gross profit 270 327 318 362 413

Gen & admin expenses (112) (130) (130) (145) (161)

Selling expenses (35) (39) (39) (43) (48)

Other operating costs 10 10 10 10 9

Operating profit 133 168 158 183 213

Operating EBITDA 176 207 189 215 247

Depreciation of fixed assets (43) (39) (31) (32) (34)

Amortisation of intangible assets (0) (0) - - -

Operating EBIT 133 168 158 183 213

Interest expense (1) (1) (1) (1) (1)

Pre-tax profit 131 167 157 182 212

Taxation (13) (19) (16) (18) (21)

Minority interests (40) - - - -

Profit after tax & minorities 79 148 142 164 191

Reported net profit 79 148 142 164 191

Recurring net profit 79 148 142 164 191


Cash flow (HKDm) Mar-13 Mar-14 Mar-15F Mar-16F Mar-17F

Operating profit 133 168 158 183 213

Depreciation & amortisation 44 40 31 32 34

Change in working capital (89) 100 (0) (7) (8)

Other operating cash flow (10) 4 1 1 1

Operating cash flow 78 312 189 209 240

Interest paid (0) - (1) (1) (1)

Tax paid (19) (9) (16) (18) (21)

Cash flow from operations 59 303 173 190 218

Capex (18) (21) (40) (45) (45)

Other investing cash flow (3) (5) - - -

Cash flow from investing activities (21) (26) (40) (45) (45)

Dividends paid (61) (29) (69) (71) (82)

Proceeds from issue of shares 0 7 - - -

Increase in debt (20) - - - -

Other financing cash flow 0 - - - -

Cash flow from financing activities (81) (22) (69) (71) (82)

Cash at beginning of period 264 222 478 542 616

Total cash generated (43) 255 64 75 91

Forex effects 1 2 - - -

Implied cash at end of period 222 478 542 616 708



2 March 2015


Financial Exhibits

Balance Sheet (HKDm) Mar-13 Mar-14 Mar-15F Mar-16F Mar-17F

Total cash and equivalents 222 478 542 616 708

Inventories 178 199 200 221 246

Accounts receivable 482 517 518 575 642

Other current assets 12 13 13 13 13

Total current assets 893 1,207 1,273 1,426 1,608

Total investments 198 193 203 216 227

Total other assets 21 21 21 21 21

Total non-current assets 219 214 224 237 247

Total assets 1,112 1,421 1,497 1,663 1,856

Accounts payable 241 354 356 394 438

Other current liabilities 275 338 339 374 414

Total current liabilities 517 692 695 768 852

Other liabilities 3 2 2 2 2

Total non-current liabilities 3 2 2 2 2

Total liabilities 520 695 698 770 854

Share capital 36 37 37 37 37

Retained earnings reserve 556 690 762 856 965

Shareholders' equity 592 727 799 893 1,001

Total equity 592 727 799 893 1,001

Total liabilities & equity 1,112 1,421 1,497 1,663 1,856


Key Ratios (HKD) Mar-13 Mar-14 Mar-15F Mar-16F Mar-17F

Revenue growth (%) (7.1) 10.1 0.2 11.0 11.5

Operating profit growth (%) (11.7) 26.3 (5.6) 15.7 16.2

Net profit growth (%) (39.6) 88.0 (4.2) 15.8 16.3

EPS growth (%) (40.2) 86.6 (4.9) 15.8 16.3

Bv per share growth (%) 4.2 20.9 10.0 11.7 12.2

Operating margin (%) 6.0 6.9 6.5 6.8 7.0

Net profit margin (%) 3.6 6.1 5.8 6.1 6.3

Return on average assets (%) 6.7 11.7 9.7 10.4 10.8

Return on average equity (%) 13.6 22.4 18.6 19.4 20.1

Net debt to equity (%) (37.4) (65.8) (67.8) (69.1) (70.7)

DPS 0.20 0.20 0.19 0.22 0.23

Recurrent cash flow per share 0.16 0.83 0.47 0.52 0.60



2 March 2015


SWOT Analysis

Strong cash flow

High dividend yield of 8-9%

Strong balance sheet

Falling LED prices might depress margins

Competition from cheaper Chinese products

More growth in the ICE segment

Potential catalyst with Phillips listing its lighting business

Single largest customer accounts for more than half of FY14’s topline

-60%

-37%

-14%

9%

31%

54%

77%

100%

0

2

4

6

8

10

12

14

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

P/E (x) vs EPS growth

P/E (x) (lhs) EPS growth (rhs)

0%

3%

6%

8%

11%

14%

17%

19%

22%

25%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

P/BV (x) vs ROAE

P/B (x) (lhs) Return on average equity (rhs)

Source: Company data, OSK-DMG Source: Company data, OSK-DMG

Company Profile Valuetronics Holdings Ltd. offers original equipment manufacturing and original design manufacturing services. The company serves customers in the telecommunications, industrial, commercial electronic products, and consumer electronic products industries.


2 March 2015


Recommendation Chart

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Feb-10 Jun-11 Sep-12 Dec-13

Price Close

Source: OSK-DMG, Bloomberg

29

RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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Documents

Valuetronics Holdings (VALUE SP) - RHB Research … would expand the group’s overall margins and lift Valuetronics ... factory in China is a distance ... business. ICE’s revenue