We hosted NDR with TK mgmt. last week, and investors are interested about 1) smart home/healthcare segments, 2) auto business progress, 3) trade war impact, and 4) capacity expansion in Vietnam. Overall, we expect revenue/net profit to recover with 20%/8% YoY in 2H19E, driven by improving orders and better margins. We fine-tuned our FY19E EPS and maintain TP of HK$4.09 based on 8.2x FY20E P/E. Trading at 7.2x FY20E P/E and 33% FY20E ROE, we think the stock is attractive and reiterate BUY.
- Smart home/healthcare as major growth drivers for FY19-20E. We expect FY19E growth to come from : 1) smart home (+20% YoY) for Google Home/Nest/Amazon and Xiaomi’s supply chain, 2) healthcare (+15% YoY) from Philips and client win for domestic e-cigarette supplier, 3) mobile and wearables (+10% YoY) driven by solid demand from Otterbox/Jabra, new in-box items for Apple and potential order win for Beats/Bose’s TWS in FY20E. In addition, mgmt. stated that TK stepped up efforts to expand into domestic clients and expect sales to reach HK$100mn/200mn in FY19/20E (vs 3% or HK$70mn in FY18).
- Automobile molding remains on fast track. We are positive on fast-growing revenue from auto display panel molding, as Faurecia, a French tier-1 supplier, now became TK’s No. 6 client in 1H19. Meanwhile, mgmt. plans to enhance its competitiveness by accelerating M&A in Europe. We estimate auto revenue to grow 13% CAGR in FY19-21E.
- CAPEX for capacity expansion in Vietnam/Huizhou/Shenzhen. TK guided CAPEX of HK$ 170mn in FY19E (vs HK$260mn in FY18), mainly for 1) transferring 10% of plastic capacity to Vietnam, 2) further expansion in Huizhou to double its capacity by FY21E, and 3) upgrade spraying production lines in Shenzhen with advanced automation.
- Stock is attractive at 7.2x P/E and 33% ROE; Maintain Buy. We fine-tuned FY19 EPS mainly to reflect lower GPM. We reiterate Buy with TP of HK$4.09 based on 8.2x FY20E P/E, in-line with its 5-year historical forward P/E. Upcoming catalysts include Google/Amazon smart home product rollouts and margin recovery with better utilization. Major risks include weaker demand in smart home and wearables, prolonged trade war and weaker macro environment.
