Valuetronics Holdings Limited - ICE segment continues to surge forward

Results slightly below; near inflexion point
VALUE reported 2QFY16 results that were slightly below our expectations. Its revenue of HK$1,077m (-14% yoy) and net profit of HK$65.7m (-6.4% yoy) for 1HFY16 formed 45% and 43% of our FY16F estimates, respectively. Revenue decline was expected to happen as the company had previously indicated that it expects to see a decline in the consumer electronics (CE) segment (-41% in revenue). This decline was more than what we had expected (about 90% of the LED products have been accelerated towards end-of-life (EOL)). The industrial and commercial electronics (ICE) segment (+28% in revenue) grew stronger than expected, with the growth coming from existing and new customers. In particular, VALUE added new revenue from a new customer in the auto industry. VALUE's gross margin for 2QFY16 grew yoy to 14.6% from 13.1% as sales mix continued to shift towards the much higher margin industrial and commercial electronics (ICE) segment. While this set of results was a tad weaker than what we had in mind, we think the down trend in revenue from the CE segment in 2QFY16 should not have surprised investors.

CE could be near the bottom
Based on our conversation with management, it looks to us that the sequential revenue decline in CE revenue, which had been pressured by LED lighting, could come to an end in 1/2Qs time as 90% of LED lighting products have reached EOL, and the remaining CE product lines consist mainly of consumer lifestyle products (resilient in nature).

No change to investment thesis
Our investment thesis for VALUE is anchored on the view that strong growth in the ICE segment, which commands higher gross margin than CE, should over time, further increase VALUE profitability, expand margins, perpetuate growth (see figure 2 & 3), and lower its customer concentration risk. In fact, VALUE's CE/ICE split is now 45%/55%, versus 1QFY13's split of 76%/24%. With this set of results, we believe events are moving in the direction as we have envisioned and hence our investment thesis remains firmly intact.

Technical Analysis
Daily Chart
Very attractive, maintain BUY
VALUE is currently trading at only 5.9x FY16F P/E (2.4x ex-cash). We keep our DCF-based TP of S$0.67, which translates to a FY16F P/E of 9x (6x ex-cash), unchanged. VALUE, which has a potential dividend yield of ~7% and has began buying back shares last Friday. (Read Report)

Read Related Report
1) Valuetronics - A New Dawn Ahead by RHB Research, published on 16 November 2015

Source : KGI Fraser Research

Labels: ,