Beneficiary of Surface Pro 4 launch
2015 results: revenue HK$8.936bn (-6.6% YoY), slightlymissing CICC & consensus by 4%. However, GPM 21.3%(+2.4ppt YoY), beating our/consensus estimates(19.3%/19.9%); and, NP was HK$875mn (+14.4% YoY), aboveboth CICCe/consensus (17.2%/9%). The better margin andbottom-line were mainly due to better product mix fromSurface Pro 4 as well as high exchange gains in 2H15.
Trends to watch
Better GM. Microsoft released its latest tablet (Surface Pro 4)and 2-in-1 detachable notebook (Surface Book) in early October.JT is leveraging its close relationship and remains the tablet’ssole casing supplier; its thinner and lighter design is morecomplicated to produce than previous versions and thus higherASP (US$50~60), contributing to its margin upside.
Switch to metal casings. Plastic casing segment’scontribution has fallen as Asus’ orders were lost due to pricecompetition and Motorola is restructuring after Lenovo’sacquisition. Management guide it will no longer focus on plasticcasings due to its thin margin and plan to start producing metalcasings in 2H16e. Management are conservative on smartphoneorders and its contribution should be limited.
Earnings revisions
Upside despite weak PC market; metal casing shipments tocontinue driving margin expansion; catalysts to come fromMicrosoft orders. Lift 2016/17e earnings 6.5%/6.1% toHK$0.75/0.88 based on further margin expansion driven bynew metal casing orders and rising contribution of Surface.
Valuation and recommendation
Ju Teng has bought back 59.2mn shares since August, reducingits shares outstanding; it is now trading at 4.55x 2016e P/E with18% dividend yield. We roll forward our P/E valuation andthus hike TP ~13.5% from HK$3.1 to HK$3.52(4.7x/3.99x 2016/17e P/E); maintain HOLD.
Risks
Lower Surface Pro shipments; lower NB market growth.