Profit warning issued for 1H16 driven by weaker demandenvironment and higher project development costs
Momentum should pick up from 2H16 on new productlaunches, better mix and stabilized pricing
Maintain Buy; TP reduced to HKD3.60 from HKD4.90 basedon 6x (unchanged) FY16e earnings
Profit warning for 1H16. Ju Teng announced today that it expects 1H16 earningsto decline substantially y-o-y for to the following reasons: 1) lacklustre global NBdemand, especially for low-end (plastic) models; 2) pricing erosion in order tomaintain market share; 3) product development costs incurred for Microsoft’s newproject ramp-up from 2H; and 4) costs related to capacity conversion from plastic tometal casing manufacturing. Based on the company’s announcement, we now expectJu Teng’s net profit to be down by 34% y-o-y for 1H16, with GPM/OPM to contract to16.0%/7.4%, respectively, from 19.1%/10.4% in 1H15. Ju Teng is due to report 1H16results in mid-August.
Momentum should recover from 2H on new product launches, better mix, andstabilized pricing. Ju Teng announced plans to buy 1,000 CNC machines in April andMay this year; it also announced it will invest in the anodization process required forNB/smartphone metal casing manufacturing. It is clear that Ju Teng is planning tofurther increase its metal casing exposure for better margins and profitability. Althoughit appears Microsoft will be phasing out the Surface 3 (unwire.hk, 26 June 2016), whichwas launched in May 2015, leading to weaker metal casing momentum for Ju Teng in1H16, the potential launch of Surface Pro 5, Surface Book 2, and Surface AIO (all-inonePC) equipped with metal casings should help earnings momentum to recover from2H16. We expect the metal casing mix to increase to 33% in 2H from 30% in 1H. Wealso expect pricing for plastic casings to stabilize after inventory digestion in 1H16.
Maintain Buy rating with TP cut to HKD3.60. We lower our FY16/17e earningsestimates by 26% and 21%, respectively, mainly to reflect a slow 1H16, weaker plasticcasing margins, and lower metal casing contribution in light of product transitions. OurTP is now set at HKD3.60 (was HKD4.90), based on 6x (unchanged) FY16e. The stockis now trading at the low-end of its historical trading range since FY12, suggesting thatnegatives (NB weakness and weaker mix in 1H) could have already been priced in.Further downside could therefore be modest, although the shares could still reactnegatively to the announcement. Our Buy rating is based on fundamental recoveryfrom 2H and valuation. Forecast dividend yield of 4.1% for 2016 should also providedownside support to the share price.