Headwinds to persist
Weak FY22 results due to supply disruptions, in line
Valuetronics reported net profit of HK$113.5m, down 38.8% y-o-y, on the back of the 11.1% decline in revenue to HK$2,027.4m, in line with our expectations. The severe shortages of certain key electronic components have affected the group’s ability to meet orders on a timely basis.
CE outperformed ICE, but it is not sustainable. Revenue for the Consumer Electronics (CE) segment was up 3.8% to HK$706.9m and accounts for 35.9% of total revenue, up from 29.8% in FY21. This was mainly due to the rebound of orders from smart lighting customers. However, this is not expected to continue due to lower customer forecasts and the component shortage.
Industrial and Commercial Electronics (ICE) revenue for FY22 decreased by 17.5% y-o-y to HK$1,320.5m. This was mainly due to the significant drop in sales caused by one of the group’s customers switching over production from the group’s factory to another vendor in North America. The component shortage also affected order fulfilment for certain ICE customers.
Margin pressure. The gross profit margin for FY22 eased to 13.6% from 16.9% in FY21. 2H22 saw a weaker margin of 13.0% vs. 14.2% in 1H22. Overall, net margin was reduced to 5.6% in FY22 from 8.2% in FY21. Margins were eroded by higher component prices due to tight supply and increased labour and operating costs in China as a result of the renminbi appreciation.
Sound balance sheet with no debt. The cash-to-market capitalisation ratio remains high at 69% for FY22, though it eased slightly from 74% in FY21.
Supply chain headwinds and inflationary pressure to persist. Valuetronics expects the component shortages, together with the cost pressure resulting from inflation, to continue to affect the group’s gross profit margin until the global component market is back to normal. Though measures to mitigate the impact are in place, headwinds are expected to persist. The group has implemented various measures towards this end, including identifying alternative parts, re-engineering products to lower cost, and leveraging the group’s supply chain knowledge to identify new sources of supply.
Vietnam expansion plan on track. The group’s newly constructed Vietnam campus in the V?nh Phúc province commenced mass production for three customers in the last quarter of FY2022, following the successful completion of ISO and customer audits.
Cut FY23F/24F earnings by 18%/23% on weaker margin assumption. We have lowered our gross margin assumption for FY23F/24F to 13.3%/13.8% from 15.3%/16.3% due to persistent headwinds from component shortages, the COVID-19 pandemic, Russia-Ukraine conflict, and US-China trade tensions. Earnings were cut by 18%/23% as a result. Maintain HOLD with a lower TP of S$0.51 (previously S$0.55), pegged to the four-year average PE of c.11x.
We are suspending coverage due to the re-allocation of resources.