TK posted revenue/NP decline of 2%/19% YoY in 1H19, largely in-line with our estimates and pre-announcement earlier, mainly due to Apple/ Google supply chain reshuffling and GPM decline (27.5% vs 31.5% in 1H18) on competition, euro depreciation and lower utilization. Looking ahead, we expect sales/NP recovery with 20%/14% YoY in 2H19E, driving utilization/margin to rebound HoH. We trimmed our FY19-21E EPS by 5-9% and 12-m TP to HK$4.09 based on same 8.2x FY20E P/E. Trading at 5.7x FY20E P/E and 33% FY20E ROE, we think the stock is attractive and reiterate BUY.
- Supply chain reshuffling in 1H19; Expect order recovery in 2H19E. TK revenue slightly declined 2% YoY, largely due to 1) smart home (Google) /comm. equipment (Polycom) down 3%/3% YoY, and 2) mobile & wearable (Apple, Otterbox, Jabra) /automobile growth of 5%/3% YoY,. Despite pricing pressure to persist into 2H19E, we believe wearables/smart home products will maintain strong growth momentum as Otterbox/Jabra/Google will deliver 20%/20%/10% YoY growth in FY19E. Projects-on-hand in 1H19E amounted to HK$ 979.3mn (+6% YoY), and we believe orders delayed to 2H19E will help ameliorate utilization rate to reach GPM of 30.5% (vs 27.5% in 1H19).
- Relocation to Vietnam and domestic expansion to combat trade war impact. TK remains cautious on long-term impact from trade war, as its smart home/mobile and wearables products (under US$ 300bn catalog) are subject to a tariff of 15% from 15 Dec. To mitigate negative effect in near term, mgmt. stated to 1) transfer part of its manufacturing, especially for smart home/mobile, to Vietnam, and 2) actively developing domestic clients, such as e-cigarette, medical appliance (e.g. BAXTER) and personal care (e.g. Philips). Meanwhile, mgmt. guided CAPEX of HK$100-200mn to support 1) building plant in Vietnam, 2) capacity expansion of Huizhou plant, and 3) Industry 4.0 producing automation for precise molding.
- Stock is attractive at 5.7x P/E and 33% ROE; Maintain Buy. We trimmed our FY19-21E EPS by 5-9% mainly to reflect lower GPM. We lowered our TP to HK$4.09 based on unchanged 8.2x FY20E P/E, in-line with its 5-year historical forward P/E. Catalysts include Google/Amazon product launch and margin recovery in 2H19E.
