2H15 results beat expectations on better margins
Positive mix shift and margin expansion to continue
TP up to HKD4.9 (was HKD4.6), based on 6x (unchanged)FY16e earnings
2H15 results beat expectations on better margins. Reported net profit of HKD521mwas up 47% h-o-h and 15% y-o-y and beat HSBCe and consensus by 10-13% mainlydue to stronger-than-expected margins. 2H GPM/OPM of 23.3%/15% were up from19.1%/10.4% in 1H15 and 19.9%/11.7% a year ago. In addition to rising metal casingmix, RMBdepreciation also helped boost margin by around 2%. That said, even if we exclude thefavorable FX impact, GPM/OPM of 21.3%/13% still improved quite substantially h-o-h andy-o-y, based purely on core business operation. Metal casing mix, based on ourestimates, is at 34% of sales for FY15 vs 28% in FY14.
Positive mix shift and margin expansion to continue on form factor migration.While global tablet shipment is expected to continue to decline by another 6% forFY16e, according to IDC, detachable tablets are expected to grow by 73% y-o-y thisyear on continued product transitions/form factor migration. We expect Ju Teng toremain a key beneficiary of this trend, backed mainly by the Surface’s strength andby its position as sole supplier of casing. Management today indicated that it istargeting to add another 1,000 units of CNC machines this year, reaching a totalcapacity of 6,000 units by August, mainly for NB and 2-in-1 device applications. Thisnew capacity addition should translate to rising metal casing mix and marginexpansions. Despite muted top-line growth (Ju Teng guided to flat sales y-o-y in1H16), management expects margins to continue to improve by 1-2% y-o-y in 1H16,echoing our view of continued margin improvement to drive earnings.
Maintain Buy, TP raised to HKD4.9. We increase our FY16/17e earnings slightly by2%/1%, respectively, to factor in better margins and yet higher tax rate as well asminority interest. Our EPS forecasts are up unproportionally by 6% and 4%, as thecompany cancelled shares it bought back in 2H15. Our new TP is now set at HKD4.9(was HKD4.6), still based on 6x FY16e. The shares are down 39% since the recentpeak on 16 April 2015 due to concerns over NB weakness. At 4.1x FY16e, webelieve such negatives are already priced into the shares. While some investorsmight be concerned about the lack of smartphone exposure, Ju Teng could actuallybe better off through continued mix, yield/efficiency and margin improvement,considering the heavy capex requirement and order/demand/product cycle volatilityof the smartphone industry. Our target multiple reflects the limited progress in productdiversification, yet it still gives 45.4% upside from current levels. Thus we maintainour Buy rating.