1H16 earnings lower than expectation on weaker margins
New product ramp-up to drive 2H16 recovery; metal casing(based on CNC) adoption in NB a potential positive for FY17
Maintain Buy with TP cut to HKD3.25 (was HKD3.60), stillbased on 6x forward earnings
1H16 earnings missed expectation. Ju Teng issued a profit warning on 15 Julyindicating that it expects 1H earnings to fall substantially y-o-y driven by factors including1) lackluster demand; 2) pricing erosion; 3) product transition/new product developmentcosts, as well as 4) costs relating to capacity conversion from plastic to metal. Despite ourreduced expectation, the actual numbers came in weaker than our forecast. Reported netprofit of HKD202m was down 61% h-o-h and 43% y-o-y; the number missed HSBCe by14%, due mainly to lower margins. 1H GPM/OPM of 14.9%/5.2% was down from19.1%/10.4% a year ago and weaker than our forecast of 16.0%/7.4%. In addition tonegative factors mentioned by the company, we think lower utilization for CNC capacityduring product transition served as another drag for margins.
2H to see recovery; rising metal casing (CNC) adoption a potential positive forFY17. For 2H, management guided to 10-15% h-o-h sales growth with GPM to be in therange of 15-20%. Guidance is below our expectations due to a delayed new productramp-up from 3Q to 4Q (likely from Microsoft), where management expects the utilizationof its CNC capacity to pick up more substantially. That said, Ju Teng guided to risingmetal casing adoption in NBs next year, especially for commercial NB models. By metalcasing adoption, what Ju Teng refers to is a material and manufacturing process shift(more than 30%) from magnesium die casting to aluminum CNC machining. Ju Teng nowhas around 6,000 units of CNC machines under the roof and has also completedinvestment in anodization, which is ready for mass production from October.Management expects its CNC capacity to be fully-utilized in FY17 and will not furtherinvest unless demand is much stronger, which should be positive for margins next year.
Maintain Buy with TP cut to HKD3.25. We cut our FY16/17e earnings by 18% and 8%,respectively, mainly to incorporate 1H results/2H guidance and lower margin assumptionsin light of lackluster demand and lowed utilization before new products ramp-up. Our TP isnow set at HKD3.25 (was HKD3.60), based on 6x (unchanged) forward earnings (rolloverto 2H16-1H17e from FY16e). In light of the profit warning issued last month, we think thecurrent share price could have factored in 1H weakness (share price down 14% since 15July). With the contribution from metal casing likely to pick up substantially from 4Q16followed by NB casing shift to CNC process next year, 1H16 could have marked thetrough with limited further downside. Our Buy rating is based on fundamental recoveryfrom 2H and valuation.