1H15 results missed guidance
Due to weak NB demand, 1H sales dropped 18.5% HoH;the company had expected a flat HoH. Also, due to themixed signals in low utilization for plastic casing and more metalcasing exposure, Ju Teng reported 1H15 gross margin at 19.1%,below its guidance of >20%.
Trends to watch
2H15 recovery disappointed. For 2H15, the Skylake delayand Windows 10 compatibility issues left Ju Teng with only20.1% HoH in sales growth, vs. consensus estimate of 27.5%HoH. Although the seasonality will drive HoH sales growth, itcan’t reverse the YoY sales decline of 1% in 2H15.
2H momentum should be driven by Surface Pro. Ju Teng iscurrently Microsoft’s sole Surface 2-in-1 supplier. Microsoftshipped nearly 3mn 2-in-1s in 2014. With Surface 3 prices lowerand Surface Pro 4 upcoming, we expect shipments for 2015 toreach 4mn units. Assuming US$50 ASP for Surface Case, Ju Tengis on track to generate HK$1.6bn or over 17.35% of revenuefrom Microsoft alone, up from about 12% in 2014. Net profitcould grow to HK$746mn in 2015 due to an estimated 32%gross margin on Surface devices (laptops get just 10~15%).
Earnings revisions
We cut our 2015 & 2016 earnings forecasts by 15.2%& 17.5% to reflect the weak NB demand.
Valuation and recommendation
Due to the wider-than-expected decline in 2015E, we’re afraid JuTeng’s earnings growth will be only 0.5% in 2015 and 10.1% in2016. We thus cut our fair P/E multiple for Ju Teng to4.7x and set our new TP at HK$3.1 (from HK$5.8).Maintain HOLD rating.
Risks
Price competition and NB demand further deteriorates