Valuetronics Holdings

[dzwm87]

Valuetronics – 2QFY14 Results – Non-rated note
(By Ken Ang and Benjamin Ong)

Valuetronics reported NPAT of HKS$39.6m, up 18.9% q-q, and 14.8% y-y (excluding loss from discontinued operations in 2QFY13). This was due to a few factors, including an increase in revenue (3.4% q-q, 6.1% y-y) from a broad base of customers, while Net profit margins improved to 6.3% (1QFY14: 5.4%, 2QFY13: 5.8%) due to an increase in contributions from the higher margin customers. Valuetronic’s balance sheet remains healthy with zero debt financing with a cash balance of HK$288.7m. Previous dividend yields range from 4.7% (FY07) to highs of 11.9% (FY12).

Key takeaways from meeting with management

85% of total revenue comes from core customers. Of this, 65% of total revenue comes from a certain large MNC, for which Valuetronics manufactures products in two of their business units. While there is concentration risk, most of these customers have a long-term relationship with Valuetronics. These customers also provide more stable recurring revenue, ignoring some seasonality and q-q volatility.
Revenue growth potential includes 1) Higher sale volume from a new mass market product being launched by the large MNC. 2) Growth of new customers in the higher margin Industrial and Commercial Electronics segment. Valuetronics highlighted that two new customers have relocated their productions to Valuetronics’ premises and they contributed 4%-5% of total revenue for 1HFY14. Vacant factory space continues to be ample at 40,000 sqf.
Rising PRC operator costs (staff expense) is a constant concern, but management has been able to minimise impact through higher productivity, including process automation and lean manufacturing. Management guides that operator costs in calendar year 2013 increased >20%, and expect another 10% increase in calendar year 2014. This trend is likely to continue for a while, based on the targeted wage levels set by the Central Government a few years ago. Management is able to tackle staff expense increases through improving productivity levels. Higher sales volumes, and continued increase in new customers are also expected to help mitigate the higher operator costs.
Management appears upbeat, and expects Gross profit margins to continue in the range of 11% - 13%, and Net profit margins of 5% - 6% despite headwinds in the macroeconomic environment.

From Philips Securities' morning commentary