1H earnings likely to be lower than expectation on weak NB demand. Ju Teng isscheduled to report its 1H15 earnings in mid-August and we expect earnings to be lower thanconsensus expectation owing to weak NB demand. The greater-than-expected NB unit decline(1H NB shipments by the top five NB ODMs declined by 8% y-o-y vs previous marketexpectations of a low single digits decline) has affected Ju Teng’s capacity utilizationnegatively (particularly for plastic casing), leading to slower sales and weaker margins.For 1H, we now expect sales to be down by 5% y-o-y with GPM/OPM at 18.7%/10.5%levels, down from 19.9%/11.7% in 2H14 (but up y-o-y); 1H15 net profit is expected togrow at 7% y-o-y.
Capacity scale down and rising metal casing mix to help stabilize and improve margins.Major plastic casing suppliers (Ju Teng included) have started to streamline their operationssince 2H14, which should help margin stabilization from 2H15, based on an estimated 25%capacity cut from the industry. We also expect metal casing to account for 37% of total sales in2H, up from 31% in 1H, backed by rising shipments of Surface 3 (launched in April) andSurface Pro 4 (upcoming in late 3Q). The Surface has been growing steadily at double digitsover the past two years as it gained traction in the commercial PC market. We think themomentum could be stronger this year with the smaller-sized and cheaper solution launched(Surface 3). Overall Surface is expected to account for 19% of sales this year, up from 15%last year, based on our forecast. We expect 2H GPM/OPM to expand to 20.9%/12.9% levelson higher metal casing mix. For FY15e, we now expect sales to be down by 3% y-o-y butGPM/OPM should improve by roughly one percentage point y-o-y to 19.9%/11.8%.
Reiterate Buy with TP of HKD5.8. We cut our FY15/16e earnings forecast by 8%/11%,respectively, mainly to reflect tepid NB sales and decreasing smartphone contribution, as MotoX will be end of life in 2H while Ju Teng is forging ZenFone orders owing to low profitability.Following our earnings estimate revision, we cut our TP to HKD5.8 (was HKD7.1), based on8x (the mid-cycle valuation over the past five years of trading history; was 9x previously)FY15e earnings. We lower our target multiple to reflect slower forecasted earnings growth(11%/13% for FY15/16e now vs 22%/14% previously). At 5.1/4.5x FY15/16e, the shares aretrading at the low-end of the historical trading range, which makes us believe further downsidecould be limited considering margin improvements in 2H on better mix and efficiency.