Weak demand continue to drag 1H16E result, GPM at pressure
We have an update with Ju Teng’s management recently. In 1H16E,they expect revenue to post a slight drop Yoy (low single digit) whileGPM expected to come down due to dampened demand onnotebooks (market expects GPM to be at ~20% vs 23.3% in 2H15).This is in-line with our view that the end demand is still weak due tomacro headwinds, while the launch of Windows 10 also did nottrigger a new round of replacement cycle in 1H16. However, with theWindows 10 free upgrade offer expires in end July, this may inducesome users to buy new systems in the form of purchasing 2-in-1tablets. We expect notebook still accounts 50-60% of revenue inFY16E, while tablet expected to account for ~35% of revenue (vs~30% in FY15) due to increasing demand for 2-in-1 tablets andclients’ new product launch towards 4Q16.
Increasing demand for 2-in-1 metal casing tablets
Though Ju Teng faces a challenging 1H16, management stilltargeted a flat yoy revenue growth for FY16E. We believe thiswould be driven by substitution demand for 2-in-1 metal casingtablets in 2H16, in which Microsoft is due to launch Surface Pro 5 asearly as 3Q16, and management target ~5mn volume shipment (~toFY15) for Microsoft in FY16E. In addition, 2-in-1 models for PC OEMs(eg, HP, Dell, Asustek, Lenovo, etc.) would also be the main growthdrivers, hence stabilizing Ju Teng’s overall GPM in FY16E.
Smartphone business lacks growth momentum
The smartphone segment still lacks of growth momentum, due toweakening global demand while management prefers to focus onCNC-related metal casings (rather than stamping casings for otherpeers), for which it is not easy to find new customers with potentiallystable order flows, and Ju Teng will not also target Chinesesmartphone vendors as well. We expect the segment together withothers will account for 10% of Ju Teng’s FY16E and FY17E revenue.
Trading at FY16E 4.4x PE, Maintain BUY with new TP HK$3.62
Ju Teng’s EPS FY15-17E is still expected to grow at 11.1% CAGR,even though we have revised down our FY16E EPS by 29.2%, toreflect the weak demand for both plastic notebook and smartphonecasings. The earnings growth would be driven by increasing metalcasing contribution hence leading to gradual GPM expansion. JuTeng is trading at 4.4x FY16E P/E (~61.0% discount to peers at10.8x PE) with 5.3% dividend yield. In view of challenging PC marketenvironment in the coming 6-12 months, as well as concentratedrevenue contribution from notebook and tablets (~90% in FY15), webelieve this remains an overhang on Ju Teng’s valuation. Wemaintain BUY with TP of HK$3.62 based on 5.5x FY16E P/E and50.0% discount to peers average.