Auto & Tech results: Tan Chong Motor (TCM MK; HOLD; TP: MYR3.40), ViTrox Corporation (VITRO MK; BUY; TP: MYR3.55)

恭喜發財!

Tan Chong Motor (TCM MK; HOLD; TP: MYR3.40): When the going gets tough..

• What's New? FY14 earnings plummeted, below street’s expectations. 4Q14 core net profit of just MYR2m (-85% QoQ, -97% YoY) took FY14 core earnings to MYR69m (-77% YoY), meeting just 83%/80% of our/ consensus full-year forecasts. Headline FY14 net profit included a net positive MYR37.3m from (i) a reversal in tax provision, (ii) write-back of NVL provision for additional import duty and (iii) revaluation gain of an investment property.

4Q14 revenue (+10% QoQ) from stronger vehicles sales (+31% QoQ) failed to transpose better earnings as core EBITDA margins (-2.3ppts) were crimped in attempts to clear off its huge inventory (MYR1.6b as at end-Sep 2014) amid stiff competition by its peers and an aggressive sales campaign in 4Q. Additionally, a weaker MYR against the USD translated to higher imported component costs.

• Whats Our View?  We cut our FY15/FY16 net profit forecasts by 48% p.a. as we slash auto EBITDA margin expectation by 1.5ppts to account for (i) higher A&P expenses to clear its still huge inventory (MYR1.5b as at end-Dec) amid intensive competition and (ii) the strengthening USD which raises imported component cost.

While management has indicated its plans to restructure TCM’s operations to a leaner business model (i.e. owning less dealerships and focus on profitable models), we see multiple headwinds in the near-term with no catalysts to excite in the near term.

Following a series of poor results, TCM’s share price has retraced 40% in the last 12 months. Now trading below book at 0.8x, valuation is fair in our view.  We now value TCM at MYR3.40 (-3%) based on 0.8x FY15 NTA (-2SD from 5Y mean), for its less sanguine outlook. HOLD.

ViTrox Corporation (VITRO MK; BUY; TP: MYR3.55): Stellar FY14 results!

• What's New? All-time high FY14 earnings within our expectation but above consensus. 4Q14 core net profit of MYR13m (+11% QoQ, +2.7x YoY) took FY14 core earnings to MYR49m (+128% YoY), accounting for 102%/108% of our and consensus full-year forecasts.

Key takeaway from this set of  strong  results is that 4Q14 results outpaced 3Q14 despite being a typically weaker quarter and this was driven by (i) higher demand for the AXI equipment, spurring a 61% QoQ revenue growth in the ABI division, and (ii) operating margin expansion (+1.9ppts) from stronger MYR/USD.

Our FY15-16 forecasts are unchanged pending an analyst briefing today; we introduce FY17 forecast. We continue to like ViTrox; its key investment thesis is intact with ST catalysts being (i) stronger replacement cycle (ii) positive exposure to a strengthening USD.

• Short term catalysts:

                             I.        Stronger replacement cycle:

·         ViTrox’s business only took flight after it entered into an agreement with Agilent Technologies to be one of the latter’s two worldwide outsourced service agents. This provided Vitrox with access to Agilent customers for the ABI products until 2017. ViTrox’s appointment also coincided in Agilent’s decision to exit the ABI business globally citing reorganisation of business strategy to focus on core competency in electronic testing.

·         As a result, ViTrox was also able to obtain IP rights to their AOI and AXI products in exchange for some royalty payment. Within 1+ years of intensive R&D, ViTrox successfully developed and built the first AXI system, codenamed V810, in Malaysia, which boasted the highest throughput among peers, superior test coverage and excellent call rates, without sacrificing accuracy. The introduction of new products in the ABI division drove ViTrox’s ABI revenue up by 9.6x in 2010, bringing group revenue to MYR87.6m (+3.8x YoY). The V810 also won the Best Product Award in 2011 from the Global Technology Awards. Since then, ViTrox’s ABI revenue has never failed to register growth even up to the latest 3Q results as at end-Sep 2014. We expect to see further growth in 2014/15 from replacement and upgrade demand by Agilent’s previous customers as their old equipment reach the tail-end of the 10-year replacement cycle. This potential replacement and upgrade sales is estimated to be ~USD80m and management expect demand from this end to ramp up over the next 2 years.

                            II.        ViTrox is a net USD exporter:

·         80% of ViTrox’s revenue in USD but only 30% of COGS in USD. Effective rate for ViTrox in FY14 is estimated to be only MYR3.25/USD1 but the rate is now 11% higher at MYR3.60/USD1. Based on our sensitivity, every 1% variation from our assumption of MYR3.50/USD1 average would affect ViTrox’s net profit by 2% on a full-year basis. MYR/USD currently trades at MYR3.60/USD1, 3% above our base assumption.

• The bigger picture. Semiconductor revenue is on the rise of about 3-4% per annum for the next 3 years (according to World Semiconductor Trade Statistics) which drives capex on equipment especially in 2015 to cope with the need for better manufacturing yields in an environment of more complicated and miniaturization of electronic components. Semiconductor Equipment and Materials International (SEMI) estimates that semiconductor equipment sales will increase by 15% YoY to USD44b from USD38b in 2014. Test and inspection equipment market (USD3.4b) making up ~9% of total semiconductor equipment sales. And for inspection equipment, where ViTrox’s expertise is, the addressable market is USD1.4b, shared among 10-12 players.
• Why do we like this counter? Although small (Market cap: MYR720m/USD198m) and rather illiquid (ADTV: USD0.2m), ViTrox is an under-researched Shariah-compliant growth stock (projected 2-year earnings CAGR of 17%) with strong balance sheet (net cash of MYR56m as at end-Dec 2014). Since the start of its operation in year 2000, ViTrox was never loss making and in FY14, core earnings 2.3x to MYR48.6m, recording a new high. Above all, ViTrox’s management are experienced and has a proven execution track record in the industry.

Reiterate BUY with unchanged MYR3.55 TP based on 12.6x CY16 PER.