By Kevin Tan
Fri, 25 Jun 2010, 08:59:09 SGT

We expect the strong momentum in market dynamics to drive VHL’s turnover in 1QFY11, with a potential to yield a second straight quarter of sequential growth. The outlook from its major customer Philips Electronics as well as from research firm Research and Markets has also been positive, and this may provide further boost to its financial performance in the coming quarters. We continue to like VHL for its growth potential (with new products in the pipeline), healthy financial position (zero gearing) and attractive 6.6% FY10 yield (payable on 12 Aug). We are maintaining our FY11 forecasts and S$0.32 fair value as the recent events are in line with our view. At 70.6% upside potential, we maintain BUY on VHL.

Strong momentum in market dynamics. We believe Valuetronics Holdings (VHL) is set to produce yet another strong set of results for its 1QFY11, after exceeding our expectations in its fiscal 4Q. Industrial production in China has continued to be strong and steady in May, with the manufacture of communication equipment, computers and other electronic equipment registering growth of 17.8% YoY, according to the National Bureau of Statistics of China. Overseas shipments for the month also grew by 48.5% YoY notwithstanding the European sovereign debt crisis and surpassed market’s call for a 30-33% growth. We expect this strong momentum in market dynamics to drive VHL’s turnover in 1QFY11, with a potential to yield a second straight quarter of sequential growth.

Positive outlook from customer and market watcher. We also note that its largest customer, Philips Electronics (estimated to contribute ~47% to its FY10 sales), had provided a more upbeat outlook during its 1Q10 results amid higher-than-expected sales growth in all its core business segments. Particularly, the group guided that it expects to sell a significant number of LED lighting installations in 2010 and step up its marketing investments in its consumer lifestyle segment. This may potentially boost VHL’s performance in the upcoming quarters. As recently projected by research firm Research and Markets, the global consumer electronics industry is likely to grow at a CAGR of ~5% during 2010-13. As such, we are sanguine on its business prospects on a longer term as well.

China’s move for RMB revaluation may raise opex. On concerns that the recent salary hike at Foxconn International may put pressure among other EMS/ODM companies and trigger a wave of wage adjustments in their China facilities, we also learnt from management that there is no negative impact from the incident as its factory average wage is already above the minimum wage requirement, having gone through the wage adjustment exercise in 2008. Nevertheless, with China’s recent move to allow for limited revaluation of RMB (possibly strengthening of the currency), this would come in line with management’s guidance and our expectation for higher operating costs in the coming quarters.

Maintain BUY. We continue to like VHL for its growth potential (with new products in the pipeline), healthy financial position (zero gearing) and attractive 6.6% FY10 yield (payable on 12 Aug). We are maintaining our FY11 forecasts and S$0.32 fair value as the recent events are in line with our view. At 70.6% upside potential, we maintain BUY on VHL.