Ju Teng International (3336 HK) Summary
Core Content
Ju Teng International, a leading supplier of plastic casings for notebook PCs, has faced a downgrade from Buy (1) to Underperform (4), with a revised 6-month target price cut from HKD6.3 to HKD3.7. This reflects a more cautious outlook on the company's future earnings due to a slower-than-expected transition to non-plastic casing businesses, which are generally more profitable.
Main Points
- Weaker Tablet Demand: 2H14 results are expected to fall short of market expectations due to weaker-than-expected tablet casing shipments to key clients like Acer, Asustek, and Amazon.
- Material Mix Shift: The contribution from non-plastic sales (including metal and composite materials) is expected to grow at a slower pace, negatively impacting earnings.
- Earnings Revisions: EPS forecasts for 2014-16 have been revised downward by 15–41%, due to lower revenue contribution from non-plastic products and reduced profit margins.
- Revenue and Profit Forecasts:
- 2H14 revenue: HKD4.8bn (down 3% YoY)
- 2H14 net profit: HKD390m (down 22% YoY)
- Revenue mix for non-plastic: 37% in 2014E, 43% in 2015E, and 44% in 2016E (down from prior forecasts of 39%, 47%, and 54%)
- Margin Compression: Gross margin for 2H14 is forecasted at 19.0%, and operating margin at 11.7%, both lower than previous estimates.
- Valuation Adjustments: The target price is now set at a 1-year-forward PER of 6x, down from 8x previously.
- Key Risks: The main upside risk is a significant order win in metal or composite material segments, which could improve the product mix and earnings.
Key Information
Revenue and Earnings
| Year to 31 Dec |
2014E (HKDm) |
2015E (HKDm) |
2016E (HKDm) |
| Revenue |
9,209 |
9,583 |
9,635 |
| Net Profit |
701 |
788 |
858 |
| EPS (HKD) |
0.600 |
0.675 |
0.735 |
Forecast Revisions
| Year to 31 Dec |
2014E (%) |
2015E (%) |
2016E (%) |
| Revenue change |
-4.2 |
-9.1 |
-18.7 |
| Net profit change |
-14.6 |
-30.1 |
-40.7 |
| Core EPS change |
-14.7 |
-30.2 |
-40.7 |
Valuation Metrics
| Metric |
2014E |
2015E |
2016E |
| PER (x) |
6.0 |
5.5 |
5.5 |
| PBR (x) |
0.7 |
0.7 |
0.7 |
| EV/EBITDA (x) |
4.6 |
4.2 |
4.2 |
Share Price Performance
| Metric |
Value |
| 12-month range |
3.87–6.39 |
| Market Cap (USD bn) |
0.61 |
| 3m Avg Daily Turnover (USD m) |
2.19 |
| Shares Outstanding (m) |
1,168 |
| Major Shareholder |
Southern Asia Management (25.6%) |
Material Mix
- Metal Casing:
- Revenue contribution: 31% of 2014E revenue (up from 29% in 2013)
- Key growth driver: Microsoft's Surface Pro 3, with potential for Surface Mini in 2015
- Expected to contribute 7–8% of revenue in 2014, mostly in 2H14
- Plastic Casing:
- Revenue contribution: 63% of 2014E revenue (down from 65% in 2013)
- Driven by low-end notebooks and smartphones like Zenfone
- Resilient demand expected in 2015, but may not improve the overall blended profit margin
- Composite Materials:
- Limited client interest and higher costs compared to plastic and metal casings
- Only a few high-end notebook clients (Sony, Lenovo, Dell) and Motorola in the smart device arena
- Progress on new orders has been limited, with potential for some wins in 2015E
Financial Summary
- Operating Profit:
- 2014E: HKD1,074m
- 2015E: HKD1,166m
- 2016E: HKD1,263m
- Net Profit:
- 2014E: HKD701m
- 2015E: HKD788m
- 2016E: HKD858m
- Gross Profit Margin:
- 2014E: 19.0%
- 2015E: 19.6%
- 2016E: 20.0%
- Operating Profit Margin:
- 2014E: 11.7%
- 2015E: 12.2%
- 2016E: 13.1%
- Net Profit Margin:
- 2014E: 7.6%
- 2015E: 8.2%
- 2016E: 8.9%
Company Profile
- Established in 2000
- Global market share of over 30% in plastic notebook casings
- Listed in Hong Kong since 2005 and in Taiwan (via TDRs) since 2009
- Diversified into metal and composite materials for tablets and smartphones
Risks and Outlook
- Main Risks:
- Slower-than-expected growth in non-plastic revenue
- Limited progress in composite materials business
- Potential margin compression due to low-margin plastic casing
- Upside Risks:
- Major order wins in metal or composite materials segments
- Higher-than-expected profit margins due to lower-than-expected expenses in new businesses
Conclusion
Ju Teng International faces challenges in its transition to higher-margin non-plastic casing solutions, with slower-than-expected growth in these areas. The company's 2H14 results are expected to miss forecasts, and the overall earnings outlook for 2014–2016 is weaker than previously anticipated. The downgrade to Underperform reflects a more conservative valuation approach and a cautious view on the company's ability to maintain a favorable material mix and profit margins in the coming years.
