Solid 1H15; Ride high on wearables/ automobiles growth
Improving profitability to continue in FY16E-17E with betterproduct mix, increasing automation (robots) and lower eff. tax rate.
We expect strong 21% FY15E-17E sales CAGR (19% previously),given stronger shipment growth in wearables (Apple/GoPro/Fitbit),medical devices (Philips), and automobiles (BMW/ Mercedes Benz).
Raised FY15-17E EPS by 3-8% and TP of HK$3.26, based on 10.5xFY16E P/E, 20% discount to its peers’ 13.1x
Stronger client portfolio to drive 26% NP FY14-17E CAGR
TK Group reported 1H15 revenue at HK$734mn, up 38.8%YoY (vs. CMSFY15E +24%YoY), driven by wearables/comm. equipment/healthcaresegments with 57%/93%/143% YoY growth. Excluding weak Euroimpacts, revenue would be 5-6% higher. NP came in at HK$71.2mn in1H, up 34.1%YoY, vs our FY15E estimate at 32%YoY growth. We raisedour FY15-17E revenue by 4-5% as we expect wearables/healthcare/automobiles to deliver 17%/28%/36% revenue CAGR, backed by strongclient portfolio including Apple/GoPro/ Fitbit/Jawbone/Philips/BMW etc.
Better margins on strong mix/automation; More M&A ahead
We revised our FY15E-17E NP by 4-7% to reflect higher revenue growthand GPM given (1) better product mix with stronger higher-marginautomobile segment, (2) increasing automation (HK$20mn capex onautomatic arms/ robots in FY15E) and (3) 1.5ppts lower eff. tax rate at17.5%. In addition, TK expects sales contribution in 2H from the 2 dealsin Shenzhen/Germany last year, and for 2H15, mgmt also expects similarautomobile M&A in US as well as client wins on Smart Home projects.
Valuation/ Key risks
Our new FY15E-17E NP is 4-7% above consensus but we think this isachievable, as potential upside (which we have not factored in) could befrom new product launch (Smart Home), potential automobile client win(from new Germany subsidiary) and possible acquisition in US targetingautomobile business. We raised our TP to HK$3.26 (36% upside) basedon 10.5x FY16E P/E (20% discount to peers’ 13.1x P/E). Key risksinclude losing major customers, capacity constraint and orders delay.