2H15e margins likely to be better than expectation. Ju Teng will report 2H15 resultson 14 March and we expect margins to be stronger than expected. Management haspreviously guided for sales growth of 20-25% h-o-h with gross margin to improve by 1-2%for 2H15. We think sales are likely to be lower than guided, owing to lacklustre NB(Notebook) demand and a restructuring plan that took place at one of its key customers;we forecast 15% h-o-h growth. That said, we expect margins to reach the high-end ofguidance. We forecast GPM/OPM to be at 21.3%/12.6% levels. This is up from19.1%/10.4% in 1H15 and higher than consensus estimates of 20.6%/11.8%, backed bybetter product mix. All in, we expect net profit to grow by 33% h-o-h and 4% y-o-y; our2H15 earnings are c3% higher than consensus.
Mix to continue to improve on form factor migration. While global tablet shipment isexpected to continue to decline by another 6% for FY16, according to IDC, detachabletablets are expected to grow by 73% y-o-y this year on continued product transitions/formfactor migration. Microsoft is likely to maintain its lead in the category backed by Surfaceproducts; Apple (with iPad Pro and the upcoming launch of iPad Air 3), along with otherPC brands, are playing catch-up through more 2-in-1 type of product offerings. We expectJu Teng to remain the key beneficiary of this trend, backed mainly by the Surface’sstrength and by its position as sole supplier of casing. Ju Teng is likely to add another 500units of CNC machines in 1H16, in preparation of new product ramp-up from 2H16. Weestimate sales contribution from Surface at 19% last year and 26% this year, suggestingrising metal casing mix and margin expansion. While the growth outlook for conventionalNB plastic casing should remain lacklustre, we believe the pricing stabilization anddecreasing competitive pressure should keep profits from deteriorating.
Maintain Buy with TP of HKD4.6. We keep our FY16e earnings largely unchanged butraise FY15e by 2.9% to reflect a better 2H15. Our TP is now set at HKD4.6 (wasHKD5.7), based on 6x (was 8x) FY16e earnings (earnings base roll forward from 2H15-1H16 to FY16e). We lower our target multiple to reflect NB weakness and limitedprogress made in product diversification. Ju Teng has previously guided for a potentialnew smartphone project win in 4Q16. We think the progress could be delayed givenmacro and end demand uncertainties as well as limited R&D resources devoted to theproject on Ju Teng’s side. 6x is the mid-cycle valuation over the past 2 years of tradinghistory. It was the time when the growth rate peaked out and the momentum started toslow while smartphone project (Moto X) didn’t work out as expected. The shares aredown 39% since the recent peak on 16 April 2015 due to concerns over NB weakness.We see limited further downside from current levels, and a 5% dividend yield shouldprovide support for the share price in our view.