Better performance in metal casings business
Ju Teng’s 2H15 operating (HK$842m, +18% YoY) and net income (HK$521m,+15% YoY) beat consensus estimates (HK$605m and HK$437m) by 39% and19%, though its sales (HK$4.7bn, -9% YoY) were 8% below expectations.Management was cautious on 2016 NB shipment growth (-5-10% YoY) butbelieved its rising metal casings orders (NB/Surface tablets), with higher ASPand margins, could help its business upside. We adjust our 2016E EPS toHK$0.82 (from HK$0.85) and lower our target P/E to 7x (from 8x) to reflect ourlower sales forecasts and weaker smartphone orders. We roll over ourvaluation base to 2016E EPS, with a new TP of HK$5.7. Reiterating Buy.
Street’s concerns overdone
Investors were worried about Ju Teng’s over 80% sales exposure to NB/tabletbusinesses, intense competition from its peers and limited smartphone sales.However, we believe the street underestimates (a) its rising sales contributionfrom metal casings in NB and Surface Pro (from 21% and 14% in 2014 to 26%and 21% in 2015), with higher GM (26-32%) and ASP (US$28-33) than plasticNB casings (13-15% and US$18-20), (b) the positive EPS impact of RMBdepreciation vs. the USD, and (c) the opportunity to win Surface book orders in2H16. The stock is undervalued by the street, in our view, trading at only 4x2016E P/E, 0.4x book and 5%+ cash yield (based on a ~23% payout ratio).
2H15 business review and 2016 outlook
We attribute Ju Teng’s solid 2H15 earnings to its improving product mix (metalcasing sales up from 41% in 2H14 and 44% in 1H15 to 47%), tight control ofexpenses and currency movement (+2% GM impact). We expect these factorsto lift Ju Teng’s GM/OPM from 21.3%/14.6% in 2015 to 21.7%/15% in 2016E;we forecast revenue, operating income and EPS at HK$9.2bn (+3% YoY),HK$1.38bn and HK$0.82 (+9% YoY) vs. consensus forecasts of HK$9.8bn,HK$1.24bn and HK$0.76.
Valuation and risks
Our target P/E multiple (7x) for our valuation is at the low end of its peers’average P/E range (7-12x), given Ju Teng’s lower ROE and higher NB salesexposure. Downside risks: slower orders for NB, tablet and smartphone, highercomponent price and inventory.