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Many near term headwinds

1HFY22 missed on cost pressures

1HFY22 PATMI of HKD56.6m (-38.1% YoY) missed, accounting for only 39%/41% of our and consensus’ FY22E estimates. This was largely due to cost pressures that eroded margins. We slash FY22-24E EPS by 20-27% to factor in an environment with lower-than-historical margins. D/G to SELL with lower TP SGD0.50, as we roll forward to 10.6x FY23E P/E.

Rising component and labour prices weigh on margins

1HFY22 revenue fell 7.3% to HKD1.015b, and was in line with our estimate. Consumer electronics revenue fell 12.5% as orders were cancelled or deferred due to chip shortages. Industrial and commercial electronics decreased 4.8% as expected loss of automotive allocation was offset by growth from printing and sensing customers that are exposed to ecommerce/ logistics. Gross and net margin fell 2.8ppt to 14.2%/5.6% respectively, due to higher components and labour costs as well as stronger CNY.

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Vietnam on track

Mass production could begin in the new Vietnam campus in 1QCY22. Aside, VALUE is finalising business terms with several new potential customers in Vietnam. VALUE is also trying to identify new sources of supply and negotiate new prices with customers to cope with current headwinds.

Wait for a better entry point

Downside risks to our forecasts include i) sustained or worsening component shortages; ii) continued labour shortage (especially nearer to Lunar New Year); and iii) slower than expected rate of passing costs to customers. Key upside risk is stronger than expected contributions from potential customers in Vietnam in FY23E. Our target multiple of 10.6x is in line with global EMS peers. While the stock looks cheap on FY23E EV/ EBITDA, we believe continued near-term weakness and uncertainties may
present a more attractive entry point for longer-term investors aiming to position for an eventual recovery.