Key focuses from investors. We hosted a non-deal roadshow with Ju Teng in Singapore on 3September. Investors were mostly interested in: 1) the growth outlook for 2H15 and beyond; 2)potential mix shifts and the impact on margins; and 3) smartphone casing opportunities.
Positive mix shifts and decreasing plastic casing supply the key drivers for profitability.As metal casing in general yields a higher GPM than plastic ones by at least 10%, rising metalcontribution would be positive to Ju Teng’s margin expansion and profitability. Metal casingaccounted for around 40% of sales in 1H15 and is guided to increase to 50% in 2H15, backedby Surface/Surface Pro shipments as well as share gains in commercial NB models. Plasticcasings, on the other hand, should also see price stabilization from 2H15e, as major suppliershave started to scale down their capacity, which would be positive for utilizations.
Smartphone casing likely a FY16 story. Ju Teng has been supplying casings for Moto X andZenfone, but contribution was small due to the supply chain reshuffle (the former) andcompetitive pricing (the latter). Management indicated that it has little interest to work onChina smartphones due to higher order volatility and inventory/receivables risks, but willtarget global brands with stable order forecast and metal casing design. Ju Teng expects to kickoff a smartphone project from October and mass ramp-up is scheduled for 2H16. It mightexpand the CNC capacity further (now at around 5,500 units), but the scale has yet to befinalized.
2H15 guidance maintained. Management continues to expect sales to grow by 20-25% h-o-hfor 2H15 with GPM improving by 1-2%, backed by rising metal casing shipment, better yieldand improving plastic casing shipment from September. Opex is guided to be lower in 2H as1H opex was boosted by one-time charges derived from the closure of JV with Wistron inKunshan. Capex for FY15-16 is guided to be at USD120m, while the cash payout should bemaintained at around 20% or HKD0.15/share.
Maintain Buy with unchanged TP of HKD5.7. We keep our FY15/16e earnings forecastunchanged. Our TP stays at HKD5.7, which is based on 8x (unchanged) forward earnings. Wethink the recent share price correction has reflected concerns over demand outlook and believefurther downside should be limited. At 4.4/4.0x FY15/16e, we see the valuation as attractiveand expect continued margin improvement to be a positive catalyst. A dividend yield of 5.2%and share buyback from the company (6.1m shares or 0.5235% as of 2 Sep) should helpcushion the downside.