Buy: Key beneficiary of Surface Pro 4/Surface Book launch
Sole supplier for metal casing of Surface Pro/Surface Book
Rising metal casing contribution and decreasing plasticcasing supply should drive better profits
Maintain Buy with unchanged TP of HKD5.7, based on 8xforward earnings
Surface Book and Surface Pro 4. Microsoft announced its Surface Book and Surface Pro 4last night. The Surface Book is a 13.5’ convertible/detachable laptop based on Intel’s SkylakeCPU, running the Windows 10 operation system. It weighs 1.515-1.579kg vs 13’ MacBookPro and MacBook Air at 1.58kg/1.35kg, respectively. Its price starts from USD1,499, and weexpect volume to be relatively small considering the product launch schedule. The Surface Pro4 (12.3’) will start from USD899; it is lighter and thinner than its predecessor and is equippedwith the latest processor as well as improved keyboard design, stylus and camera.
Ju Teng to benefit as the sole supplier of Surface Pro/Surface Book metal casing. Ju Tenghas been working on Surface Pro 3 casing (based on magnesium CNC) as the sole source since2H14; we expect this to remain unchanged. Overall Surface contribution is estimated at around19% this year. Other key Surface suppliers include Pegatron (4938 TT, Hold, TP TWD96,CMP TWD82.1) for assembly and Chicony (2385 TT, Hold, TP TWD83, CMP TWD81.2) forkeyboard and power supply. Considering the revenue scale that Pegatron is running at and thefact that Surface Pro 3’s keyboard would be compatible with Surface Pro 4, we think thepositive impact from new product launch will be diluted for Pegatron and Chicony.
Rising metal casing mix and decreasing plastic casing supply are structurally positive. Asmetal 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, according to the management, and is guided toincrease to 50% in 2H, backed by Surface/Surface Pro shipments as well as share gains incommercial NB models. Plastic casings should also see price stabilization from 2H15e, asmajor suppliers have scaled down their capacity, which would be positive for utilizations.
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.Despite lacklustre NB demand outlook, we would advise investors to focus on Ju Teng’spositive mix shifts and margin improvements. At 5.7/5.2x FY15/16e PE, we see the valuationas attractive. A dividend yield of 4.1% and share buyback from the company (30.12m sharesor 2.616% as of 5 October) should help cushion the downside.