2HFY22 beat on strong cost control; U/G to Neutral
2HFY22 PATMI of HKD56.9m (-40.5% YoY) beat our and consensus’ estimates
on lower-than-expected SG&A costs. Our FY23E PATMI is largely unchanged
as higher revenue expectation is offset by softer margin expectations. U/G
to HOLD from SELL with unchanged TP of SGD0.50 (10.6x FY23E P/E) as we
see risk reward turning neutral. Catalyst for rerating would be from
evidence of i) easing of supply side issues, coupled with ii) still strong
demand outlook.
Sales dip from auto customer shift and chip shortage
2HFY22 revenue fell 14.6% YoY to HKD1.012b. Industrial and commercial
electronics (ICE) revenue dropped 28% YoY due to the expected drop in
automotive sales from a planned production switch-over to another vendor
in North America, as well as some impact from chip shortages. Consumer
electronics (CE) jumped 22.8% from a rebound in smart lighting orders on
easy YoY base effects. Gross margin fell 3.9ppt YoY to 13.0% on higher
component prices and increased labour cost. FY22A SG&A costs accounted
for only 91% of our FY22E on lower commissions and stringent cost control.
Areas of friction
We believe a key reason for gross margin erosion is that VALUE had to
procure components from the spot market amid current shortages. Our
margin assumptions are lower in FY23-24E as we expect this to continue
amid current shortages. Demand appeared robust across most products,
especially ICE, except smart lighting.
Vietnam updates
The new Vietnam campus in Vin Phuc started mass production for 3
customers in 4QFY22. VALUE is preparing for trial production for new ICE
customers, which should contribute to FY23 revenue. They include a
hardware customer for retail chain stores, and a customer providing
cooling solutions for HPCs. The balance sheet remains healthy with cash
(no debt) to market cap at c.70%. Key risk to our view is if the spread of
Covid-19 in China results in VALUE’s factory needing to shut.