20160422-高盛-Increasing_automation_appetite_+_FX_tailwind__Buy_Delta__CL_,_AirTAC_21页_986kb

Summary of Taiwan: Industrials Analysis

Core Content

This report analyzes the performance and outlook of key companies in the Taiwan Industrials sector, focusing on the impact of the China Manufacturing 2025 policy and the JPY appreciation on automation demand and pricing power. It also evaluates the valuation and investment thesis for Delta Electronics (2308.TW), AirTAC (1590.TW), Hiwin (2049.TW), and Advantech (2395.TW).

Main Points

Policy Support and Automation Demand

• The China Manufacturing 2025 policy is a key driver of increased automation demand in China.
• Nine provinces have issued automation-related policies as of the current year, compared to seven in 4Q15, indicating a growing appetite for upgrading factory facilities.
• The automation penetration rate in general industry is expected to increase, with the current rate at 20% (vs. 70% in auto and electronics).
• Companies with standardized and lower cost automation products, such as AirTAC, are expected to benefit the most from this trend.

FX Tailwinds and Pricing Power

• The JPY has appreciated by ~16% against the TWD since June 2015, helping reverse the pricing trend between Taiwanese and Japanese automation component makers.
• Machine tools companies in Taiwan are seeing a wider price gap (20%-30%) compared to Japanese peers, which should boost demand for automation components.
• This FX movement is expected to improve the pricing power and competitive position of Taiwanese automation component makers.

Company-Specific Analysis

Delta Electronics (2308.TW)

• Buy (on Conviction List): Expected to resume growth trajectory from 2Q16.
• 2016E Organic Sales Growth: 6% yoy (vs. 0.7% in 2015).
• 2016E Earnings Growth: 8% yoy (vs. -10% in 2015).
• High margin products (automation and passive components) are expected to drive growth.
• Current P/E: 18.6x (vs. 5-year average of 19.3x).
• Target Price: NT$213 (2% increase from previous).
• Key Risks: Global economic slowdown, lower-than-expected synergies from Eltek acquisition, higher-than-expected operating expenses.

AirTAC (1590.TW)

• Buy: Expected to benefit significantly from the China 2025 plan.
• 2016E Earnings Growth: 53% yoy.
• Key Drivers: Standardized and lower cost products, which are easier to implement in general industry.
• Target Price: NT$243 (33% increase from previous).
• Potential Upside: 13%.
• China Exposure: 89% of sales.

Hiwin (2049.TW)

• Sell: Near-term upside is already priced in.
• Current P/E: 24.8x (above 5-year mid-cycle P/E of 24.0x).
• 2016E EPS: 14% below Bloomberg consensus.
• Target Price: NT$111 (16% decrease from previous).
• Potential Downside: -26%.
• China Exposure: 45% of sales.

Advantech (2395.TW)

• Neutral: Expected to resume double-digit sales growth, but valuation suggests growth is already priced in.
• 2016E Sales Growth: 14% yoy (vs. 6% in 2015).
• 2016E Earnings Growth: 17% yoy (vs. 4% in 2015).
• Current P/E: 24x (above 5-year average of 18x).
• Target Price: NT$217 (9% increase from previous).
• Potential Downside: -4%.
• Key Risks: Currency volatility, weak synergies from M&A, higher/lower operating expenses.

Key Information

• Valuation Rollover: The valuation basis is rolled over to 2H16-1H17E from 2016E.
• EPS Growth: Across 2016E-18E, the report raises EPS by 1%-18% for the Taiwan Industrials coverage.
• Target Price Adjustments:
  • Delta: NT$213 (2% increase).
  • AirTAC: NT$243 (33% increase).
  • Hiwin: NT$111 (16% decrease).
  • Advantech: NT$217 (9% increase).
• P/E Ratios:
  • Delta: 18.8x (2016E).
  • AirTAC: 18.5x (2016E).
  • Hiwin: 24.5x (2016E).
  • Advantech: 23.9x (2016E).
• Dividend Yield:
  • Delta: 3.4% (2016E).
  • AirTAC: 3.5% (2016E).
  • Hiwin: 3.8% (2016E).
  • Advantech: 3.4% (2016E).
• ROE:
  • Delta: 15.8% (2016E).
  • AirTAC: 19% (2016E).
  • Hiwin: 11% (2016E).
  • Advantech: 24% (2016E).

Valuation Summary

Company	Mkt Cap (US$mn)	Ratings	Current Share Price (NT$)	New Target Price (NT$)	% Change from Previous	Potential Upside/Downside
Delta	11,786	Buy*	147.0	213.0	2%	45%
AirTAC	1,194	Buy	216.0	243.0	33%	13%
Hiwin	1,243	Sell	149.5	111.0	16%	-26%
Advantech	4,396	Neutral	225.5	217.0	9%	-4%

Key Risks

• Global economic slowdown.
• Weaker/stronger-than-expected end market demand.
• Currency volatility (particularly Euro, USD, and RMB).
• Synergies from M&A (especially Eltek acquisition).
• Operating expenses (variable in nature).

Conclusion

The report highlights a positive outlook for automation demand in China, driven by the China Manufacturing 2025 policy, and FX tailwinds from JPY appreciation, which benefit the Taiwanese automation component makers. Companies like Delta and AirTAC are expected to see strong growth, while Hiwin is seen as overvalued and facing weak demand. Advantech is evaluated as having a neutral outlook due to its valuation already reflecting expected growth. The report concludes with Buy ratings for Delta and AirTAC, and a Sell for Hiwin.