Action
We downgrade Ju Teng (JT) from BUY to ACCUMULATE, as we believe the 19% share price outperformance YTD is overdone, on expectations that were too high for metal/composite material casing development.
JT reported 2H13 revenue/net income of HK$4.95bn/0.50bn, 0.3%/30.6% higher than our estimate driven by better gross margin.
Reasoning
Outperformance overdone on high expectation of non-plastic penetration. JT's share price rebounded 19% YTD vs. HSI/CICC electronic component coverage at -7.8%/+8.2%; but plastic still constituted ~70% of total revenue in 2013, higher than our estimate of 60%. We believe the market's expectations are too high on metal/composite material casing penetration.
Smartphone casing orders delayed. JT entered the smartphone casing market in August 2013, but has been involved in only one model to date. JT guided one order has been delayed from 2Q14 to 3Q14, we believe this could hamper sentiment on the company.Current valuation not as attractive. Although we are still positive on JT's migration from plastic to metal/composites, and higher exposure to tablet/smartphones, the stock is now trading at ~8x 2014e EPS on the back of single-digit revenue growth in 2014~15E, we see limited upside of 18% from here.
Earnings forecast and valuation
We slightly trim 2014/15e revenue for slower-than-expected metal/composite material penetration, but raise 2014/15e EPS to HK$0.78/0.86 from HK$0.76/0.84 on a bit lower opex estimate. We raise our 12m TP by 2% to HK$7.2 according to the revised 2014e EPS estimate, and see limited upside of 18% for now, we downgrade our rating on Ju Teng to ACCUMULATE.
Risks
The NB industry's lack of growth prevents JT from continually focusing on NB business, which still contributes 65% of 2014 revenue; worse-than-expected smartphone shipments from Moto and no additional orders from other smartphone vendors.