Valuetronics

Valuetronics: Maybank-KE initiated with Sell and TP $0.25 on uncertain future and price pressure experienced by its LED lighting customers from Chinese competitors. LED lighting business (under consumer electronics) accounts for some 40% of revenue and 30% of gross profits. One major fundamental change that introduces uncertainty is the spinning off of LED lighting business by its largest customer, a Dutch lighting, consumer electronics and healthcare conglomerate. In view of this rather recent development, our house forecasts 9% and 4.7% declines in earnings for FY15-16E, during which the new entity housing the Dutch customer’s lighting unit will be undergoing restructuring. A turnaround to growth is expected earliest in FY17E. At the same time, other LED customers are also experiencing margin compression due to fierce competition from Chinese peers, who have now become the strongest in fairly-dim 40W bulbs. The industrial business segment, which accounts for 30% revenue and 46% of its gross profit, has been holding up and is expected to overtake consumer electronics by FY3/15E. However, even at 25-12-12% top line growth in the next three years, this insufficiently compensates for the expected drop in income in consumer electronics. In the longer term, we believe Valuetronics is still capable of turning positive as they acquire new customers under consumer electronics and as existing customers expand their product ranges. The house is extremely conservative, assigns zero value to its lighting business and 4-6x P/E to its industrial and non-lighting businesses, or 40-60% discount to peer averages. Overall, Valuetronics is valued at 4.4x P/E. Removal From Value Portfolio We remove Valuetronics from our Market Insight’s model Value for a loss of 2.6% due to the fundamental change and new Sell report. Valuetronics’ single most important customer had announced on 23 September to spin off its lighting business, either to be sold off to investors or listed on an exchange. Siemens also spun off its light bulb maker, Osram, last year. Having risen to a peak of $0.57 (approx. 46% gains from our entry in May) before falling to current levels, we are now of the view that near-term downside outweighs upside.