QR DeCode
20 February 2017
QR DeCode Pantronics Holdings Limited – An expanding EMS company Pantronics Holdings Limited (PHL) has been a trusted EMS provider to renowned US, European and Asian customers. Its solenoid coils are regularly used by famous machinery manufacturers in the US. Recently, it has secured orders from a European company to manufacture a heating system filter, thereby expanding its product range and capabilities. Setting up a JV with its largest customer – The management believes that this new venture could bring mutual benefits to both parties with the JV producing a larger product range and removing geographical limitations on sales. PHL will own majority interests in the JV and this will be positive for its top-line growth.
Striving to improve its GPM – PHL is trying to improve its overall gross profit margin by phasing out low-margin products and replacing them with new products with better prospects including heating system filters and electronic hooks. In addition, PHL is planning to strengthen its product development capabilities by continuing to invest in highly-competent employees in order to expand its core competencies. New factory to increase efficiency – The company is currently relocating its manufacturing base from the Songgang factory to a self-contained leasehold location in the Shenzhen area in order to modernize its production processes and improve production efficiency to take advantage of its expanding product range. Furthermore, the land of the Songgang factory is estimated to have a market value of RMB100mn, compare to the th net carrying cost of HK$10.5mn as at 30 Sep 2016. The management is exploring various options to realize its value.
th
Sufficient cash resources for further expansion – As at 30 Sep 2016, PHL had cash of approximately HKD74.5mn. After adjusting for the net proceeds of HKD63.6mn from the IPO in Nov 2016, dividend payments and approximately HKD62.0mn to be utilized in the factory relocation, it is estimated to have cash of HKD46.1mn. This is equivalent to about 12% of its current market cap. Thus the company’s financial condition is considered sound and healthy.
Share Information Stock Code Quam’s Rating Last Closing (HK$) 52-week range (HK$) 3-mth ADT (HK$’mn) Market Cap. (HK$’mn) Shares outstanding (‘mn) Free float SH-HK Stock Connect SZ-HK Stock Connect
1611 HK Not Rated HK$1.28 1.11 – 2.10 N/A 384 300 30% No No
Substantial Shareholders Hsu Simon Nai-Cheng
70.00%
Share Price Performance
Source: Bloomberg
HK’mn Revenue EBITDA Net profit
Key Financials – FY SEP FY14 FY15
FY16
334 39 30
328 43 33
289 43 15
na na na na
na na na na
0.062 na na 0.131
na na na na
na na na na
na na na na
EPS (HKD) Growth DPS (HKD) BVPS (HKD) PER (x) PBR (x) EV/EBITDA (x) Dividend Yield (%) Source: Bloomberg
Tsz Wang Poon : +852 2971 5432 : [email protected]
For important disclosures regarding Quam Research, including with respect to any issuers mentioned herein, please refer to the disclaimers at the back of the report.
Positive development prospect PHL is an EMS player focused on solenoid coils, battery chargers and power supply as well as LED products. Figures below show that while PHL’s revenue has decreased slightly, its gross margin is increasing. Despite the continued economic slow-down in Europe and the US, solenoid coil orders are up by double digits in 1Q17. The company’s gross profit margin has improved from 18.4% in FY14, to 22.4% in FY15 and 23.9% in the first 8 months of FY16. PHL is expected to maintain an overall GPM at above 20% as the company replaces its low-margin products with higher–margin products. PHL is expected to receive more sales orders and, with its improving GPM, the net profit of the company is likely to increase in the future. Figure 1: Revenue and gross profit margin breakdown
Source: Company data
New products to enhance income stream PHL is now manufacturing a heating system filter for a European company which prevents ferrous contamination in central heating systems. In addition, it is also developing new products including an electronic hook. By connecting to an electricity source, the glue on the back of the hook is activated and the hook is ready for use on multiple surfaces. This reusable, removable hook has obtained a patent in China. The company is looking to expand its product range, capabilities and patent coverage to its major markets in the forthcoming year.
Risk factors
Additional depreciation and rental expenses due to relocation, while the costs of the new plant may cause a deterioration in financial performance for FY17;
Any disruption or termination of business relationships with its major customers or fluctuations in their demand;
Any increase in the cost of labour may adversely affect the company’s business, financial condition, operational results and growth prospects;
Fluctuations in raw material prices may affect the cost of sales and adversely affect the business operations and profitability of the company.
PHL (1611 HK)
2
Peer comparison Taking into consideration the business model, we have selected some OEM and EMS manufacturers listed in Hong Kong for comparison purposes. Tongda (698 HK) is a mobile phone shell manufacturer of several well-known Chinese mobile phone companies, while Ten Pao (1979 HK) is a manufacturer which mainly produces wireless chargers and has a common customer with PHL. In addition, Ka Shui (822) is a manufacturer of alloy die casting and plastic injection products for electronic and automotive companies, while Suga (912) mainly produces specialized electronic products for companies in the professional audio equipment business. Figure 3 shows that the ROE of PHL is 51.3%, which is the highest among the peers, while its GPM is 23.9%, well above the average of 19.0%. Figure 2: Peers comparison Company Name
Ticker
P/E
Last Price
Market Cap
Hist
Current
Next
P/B
Div Yield
(HK$)
(HK$'bn)
(x)
(x)
(x)
(x)
(%)
Trailing 12Net mth T/O Profit ('mn)
PANTRONICS HOLDI
1611 HK
1.28
0.38
20.7
N/A
N/A
9.79
N/A
289
OEM & EMS companies TONGDA GROUP HLD TEN PAO GROUP HO SUGA INTL HLDGS KA SHUI INTL HLD
698 HK 1979 HK 912 HK 822 HK
2.62 1.70 2.62 0.60
15.17 1.70 0.73 0.54
19.0 10.2 9.0 N/A
15.8 9.2 N/A N/A
12.5 7.2 N/A N/A
3.54 5.22 1.08 0.75
1.6 1.2 5.7 0.0
6,432 2,256 1,373 1,591
12.7
12.5
9.9
2.65
2.1
Simple average
EV / EBITDA
GPM
(x)
(%)
(%)
(%)
(%)
(%)
Currency
15
N/A
23.9
5.1
N/A
51.3
23.1
HKD
789 128 81 (61)
8.7 3.1 4.9 8.3
24.9 17.3 14.7 19.0
11.6 5.7 5.9 -4.1
33.5 N/A (53.7) N/A
20.0 35.3 11.0 -1.7
11.8 11.1 7.3 1.0
HKD HKD HKD HKD
19.0
4.7
(10.1)
('mn)
Source: Bloomberg, Quam Securities
Company Overview Headquartered in Hong Kong, PHL began its business as an OEM manufacturer over 30 years ago and evolved to become a manufacturer in the EMS industry. PHL has been listed on HKEX since st 21 Nov, 2016, on which date it offered 90mn shares at HKD1.50/share. The net proceeds from the Share Offer was approximately HKD63.6mn, and the majority of which will be used for the re-location of its production facilities. Figure 3: Shareholding Structure Hsu Simon Nai-Cheng 70%
Public 30%
Stock code: 1611
Source: Company data, HKEX, Quam Securities
PHL (1611 HK)
3
Net EPS Margin Growth
ROE
ROA
Appendix: Financial Statements & Ratios Figure 4: Financial Statements & Ratios 2014 334 (273) 62
2015 328 (260) 68
2016 289 (220) 69
Other income and gains, net Selling and distribution expenses Administration expenses Other operating expenses Operating profit
7 (10) (23) 1 37
4 (9) (22) (1) 41
3 (8) (22) (1) 41
Finance costs Other gains/ (expenses) Profit before tax Income tax expense Profit after tax Attributable profit to shareholders Minority interest
(1) 1 37 (7) 30 30 na
(1) 4 43 (10) 33 33 na
(1) (16) 23 (9) 15 15 na
Key Ratios Debt to equity (%) Net debt to equity (%) Current ratio (x) Quick ratio (x) Interest coverage (x) Days inventory (days) Days receivable (days) Days payable (days) Cash conversion cycle (days)
2014 33.0 0.0 9.7 1.88 0.89 57.06 43 65 41
2015 56.5 (30.1) 9.3 1.59 1.33 38.22 41 72 47
2016 128.1 (112.3) 10.4 1.11 0.89 32.33 37 75 49
Ratio Analysis Growth (YoY%) Revenue EBITDA Net profit Diluted EPS Margins (%) Gross profit margin EBIT margin Net profit margin Other ratios (%) Return on average assets Return on average equity
2014
2015
2016
2.8 22.9 29.9 na
(2.1) 9.9 10.0 na
(11.8) 1.0 (55.8) na
18.4 11.6 9.0
20.8 13.0 10.1
23.9 14.9 5.1
11.7 28.1 na
15.9 33.2 na
8.3 27.0 na
Income Statement (HKD’mn) Revenue Cost of goods sold Gross profit
Dividend payout ratio Source: Bloomberg
PHL (1611 HK)
4
2014
2015
2016
19 0 0 0 19
19 0 0 0 19
17 0 0 0 17
36 64 80 40 220 240
22 66 4 67 160 179
21 53 10 74 159 176
36 40 41 117
28 44 29 100
31 40 72 144
0 0 0 117
0 1 1 101
0 1 1 145
0 122 122 0 122
0 78 78 0 78
0 31 31 0 31
Cash Flow Statement (HKD'mn) Operating cash in/(out) flow Investing cash in/(out) flow Financing cash in/(out) flow Net change in cash
2014 30 (75) 26 (20)
2015 31 72 (77) 27
2016 43 (1) (35) 7
Per Share (HKD) EPS Diluted EPS DPS BVPS
2014 na na na na
2015 na na na na
2016 0.062 0.062 na 0.131
Balance Sheet (HKD’mn) Non-current assets PPE Itangible assets LT investments & receivables Others Total non-current assets Current assets Inventories Account receivables Bank balances and cash Others Total current assets Total assets Current liabilities Account payables ST borrowings Others Total current liabilities Non-current liabilities LT borrowings Other non-current liabilities Total non-current liabilities Total liabilities Shareholders’ equity Share capital Reserves Total shareholders’ equity Minority interest Total equity
Disclaimer and Risk Statement This document is published by Quam Securities Company Limited ("Quam Securities"), a licensed corporation (CE number AAC577) regulated by the Securities and Futures Commission in Hong Kong. Quam Securities is an affiliate of Quam Limited (0952.hk) and its group of companies (collectively "Quam Group"). This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. In particular but without limitation, neither this document nor any copy hereof may be taken or transmitted into Japan, Canada or the United States or distributed, directly or indirectly, into the United States or to any U.S person (within the meaning of Regulation S under the U.S. Securities Act of 1933) or general public located in Mainland China (but not including people in Hong Kong, Macau and Taiwan). This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. The opinions and/or recommendations of this document do not take into account the recipients' own investment objectives, investment experience, financial situation and other personal circumstances. The recipients of this document shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this document. This document is for informational purpose only and should not be treated as a recommendation on any particular securities, financial instrument, investment portfolio or trading strategy. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions. Opinions and/or recommendations expressed in this document are subject to change without prior notice to all recipients. Quam Group has an investment banking relationship with the issuer within the preceding 12 months from the date of publication of this document. The following analyst hereby certify that their views about the issuer and its securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Tsz Wang POON (CE No. BIB419) and their associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.
PHL (1611 HK)
5
QR DeCode Pantronics Holdings Limited – An expanding EMS company Pantronics Holdings Limited (PHL) has been a trusted EMS provider to renowned US, European and Asian customers. Its solenoid coils are regularly used by famous machinery manufacturers in the US. Recently, it has secured orders from a European company to manufacture a heating system filter, thereby expanding its product range and capabilities. Setting up a JV with its largest customer – The management believes that this new venture could bring mutual benefits to both parties with the JV producing a larger product range and removing geographical limitations on sales. PHL will own majority interests in the JV and this will be positive for its top-line growth.
Striving to improve its GPM – PHL is trying to improve its overall gross profit margin by phasing out low-margin products and replacing them with new products with better prospects including heating system filters and electronic hooks. In addition, PHL is planning to strengthen its product development capabilities by continuing to invest in highly-competent employees in order to expand its core competencies. New factory to increase efficiency – The company is currently relocating its manufacturing base from the Songgang factory to a self-contained leasehold location in the Shenzhen area in order to modernize its production processes and improve production efficiency to take advantage of its expanding product range. Furthermore, the land of the Songgang factory is estimated to have a market value of RMB100mn, compare to the th net carrying cost of HK$10.5mn as at 30 Sep 2016. The management is exploring various options to realize its value.
th
Sufficient cash resources for further expansion – As at 30 Sep 2016, PHL had cash of approximately HKD74.5mn. After adjusting for the net proceeds of HKD63.6mn from the IPO in Nov 2016, dividend payments and approximately HKD62.0mn to be utilized in the factory relocation, it is estimated to have cash of HKD46.1mn. This is equivalent to about 12% of its current market cap. Thus the company’s financial condition is considered sound and healthy.
Share Information Stock Code Quam’s Rating Last Closing (HK$) 52-week range (HK$) 3-mth ADT (HK$’mn) Market Cap. (HK$’mn) Shares outstanding (‘mn) Free float SH-HK Stock Connect SZ-HK Stock Connect
1611 HK Not Rated HK$1.28 1.11 – 2.10 N/A 384 300 30% No No
Substantial Shareholders Hsu Simon Nai-Cheng
70.00%
Share Price Performance
Source: Bloomberg
HK’mn Revenue EBITDA Net profit
Key Financials – FY SEP FY14 FY15
FY16
334 39 30
328 43 33
289 43 15
na na na na
na na na na
0.062 na na 0.131
na na na na
na na na na
na na na na
EPS (HKD) Growth DPS (HKD) BVPS (HKD) PER (x) PBR (x) EV/EBITDA (x) Dividend Yield (%) Source: Bloomberg
Tsz Wang Poon : +852 2971 5432 : [email protected]
For important disclosures regarding Quam Research, including with respect to any issuers mentioned herein, please refer to the disclaimers at the back of the report.
Positive development prospect PHL is an EMS player focused on solenoid coils, battery chargers and power supply as well as LED products. Figures below show that while PHL’s revenue has decreased slightly, its gross margin is increasing. Despite the continued economic slow-down in Europe and the US, solenoid coil orders are up by double digits in 1Q17. The company’s gross profit margin has improved from 18.4% in FY14, to 22.4% in FY15 and 23.9% in the first 8 months of FY16. PHL is expected to maintain an overall GPM at above 20% as the company replaces its low-margin products with higher–margin products. PHL is expected to receive more sales orders and, with its improving GPM, the net profit of the company is likely to increase in the future. Figure 1: Revenue and gross profit margin breakdown
Source: Company data
New products to enhance income stream PHL is now manufacturing a heating system filter for a European company which prevents ferrous contamination in central heating systems. In addition, it is also developing new products including an electronic hook. By connecting to an electricity source, the glue on the back of the hook is activated and the hook is ready for use on multiple surfaces. This reusable, removable hook has obtained a patent in China. The company is looking to expand its product range, capabilities and patent coverage to its major markets in the forthcoming year.
Risk factors
Additional depreciation and rental expenses due to relocation, while the costs of the new plant may cause a deterioration in financial performance for FY17;
Any disruption or termination of business relationships with its major customers or fluctuations in their demand;
Any increase in the cost of labour may adversely affect the company’s business, financial condition, operational results and growth prospects;
Fluctuations in raw material prices may affect the cost of sales and adversely affect the business operations and profitability of the company.
PHL (1611 HK)
2
Peer comparison Taking into consideration the business model, we have selected some OEM and EMS manufacturers listed in Hong Kong for comparison purposes. Tongda (698 HK) is a mobile phone shell manufacturer of several well-known Chinese mobile phone companies, while Ten Pao (1979 HK) is a manufacturer which mainly produces wireless chargers and has a common customer with PHL. In addition, Ka Shui (822) is a manufacturer of alloy die casting and plastic injection products for electronic and automotive companies, while Suga (912) mainly produces specialized electronic products for companies in the professional audio equipment business. Figure 3 shows that the ROE of PHL is 51.3%, which is the highest among the peers, while its GPM is 23.9%, well above the average of 19.0%. Figure 2: Peers comparison Company Name
Ticker
P/E
Last Price
Market Cap
Hist
Current
Next
P/B
Div Yield
(HK$)
(HK$'bn)
(x)
(x)
(x)
(x)
(%)
Trailing 12Net mth T/O Profit ('mn)
PANTRONICS HOLDI
1611 HK
1.28
0.38
20.7
N/A
N/A
9.79
N/A
289
OEM & EMS companies TONGDA GROUP HLD TEN PAO GROUP HO SUGA INTL HLDGS KA SHUI INTL HLD
698 HK 1979 HK 912 HK 822 HK
2.62 1.70 2.62 0.60
15.17 1.70 0.73 0.54
19.0 10.2 9.0 N/A
15.8 9.2 N/A N/A
12.5 7.2 N/A N/A
3.54 5.22 1.08 0.75
1.6 1.2 5.7 0.0
6,432 2,256 1,373 1,591
12.7
12.5
9.9
2.65
2.1
Simple average
EV / EBITDA
GPM
(x)
(%)
(%)
(%)
(%)
(%)
Currency
15
N/A
23.9
5.1
N/A
51.3
23.1
HKD
789 128 81 (61)
8.7 3.1 4.9 8.3
24.9 17.3 14.7 19.0
11.6 5.7 5.9 -4.1
33.5 N/A (53.7) N/A
20.0 35.3 11.0 -1.7
11.8 11.1 7.3 1.0
HKD HKD HKD HKD
19.0
4.7
(10.1)
('mn)
Source: Bloomberg, Quam Securities
Company Overview Headquartered in Hong Kong, PHL began its business as an OEM manufacturer over 30 years ago and evolved to become a manufacturer in the EMS industry. PHL has been listed on HKEX since st 21 Nov, 2016, on which date it offered 90mn shares at HKD1.50/share. The net proceeds from the Share Offer was approximately HKD63.6mn, and the majority of which will be used for the re-location of its production facilities. Figure 3: Shareholding Structure Hsu Simon Nai-Cheng 70%
Public 30%
Stock code: 1611
Source: Company data, HKEX, Quam Securities
PHL (1611 HK)
3
Net EPS Margin Growth
ROE
ROA
Appendix: Financial Statements & Ratios Figure 4: Financial Statements & Ratios 2014 334 (273) 62
2015 328 (260) 68
2016 289 (220) 69
Other income and gains, net Selling and distribution expenses Administration expenses Other operating expenses Operating profit
7 (10) (23) 1 37
4 (9) (22) (1) 41
3 (8) (22) (1) 41
Finance costs Other gains/ (expenses) Profit before tax Income tax expense Profit after tax Attributable profit to shareholders Minority interest
(1) 1 37 (7) 30 30 na
(1) 4 43 (10) 33 33 na
(1) (16) 23 (9) 15 15 na
Key Ratios Debt to equity (%) Net debt to equity (%) Current ratio (x) Quick ratio (x) Interest coverage (x) Days inventory (days) Days receivable (days) Days payable (days) Cash conversion cycle (days)
2014 33.0 0.0 9.7 1.88 0.89 57.06 43 65 41
2015 56.5 (30.1) 9.3 1.59 1.33 38.22 41 72 47
2016 128.1 (112.3) 10.4 1.11 0.89 32.33 37 75 49
Ratio Analysis Growth (YoY%) Revenue EBITDA Net profit Diluted EPS Margins (%) Gross profit margin EBIT margin Net profit margin Other ratios (%) Return on average assets Return on average equity
2014
2015
2016
2.8 22.9 29.9 na
(2.1) 9.9 10.0 na
(11.8) 1.0 (55.8) na
18.4 11.6 9.0
20.8 13.0 10.1
23.9 14.9 5.1
11.7 28.1 na
15.9 33.2 na
8.3 27.0 na
Income Statement (HKD’mn) Revenue Cost of goods sold Gross profit
Dividend payout ratio Source: Bloomberg
PHL (1611 HK)
4
2014
2015
2016
19 0 0 0 19
19 0 0 0 19
17 0 0 0 17
36 64 80 40 220 240
22 66 4 67 160 179
21 53 10 74 159 176
36 40 41 117
28 44 29 100
31 40 72 144
0 0 0 117
0 1 1 101
0 1 1 145
0 122 122 0 122
0 78 78 0 78
0 31 31 0 31
Cash Flow Statement (HKD'mn) Operating cash in/(out) flow Investing cash in/(out) flow Financing cash in/(out) flow Net change in cash
2014 30 (75) 26 (20)
2015 31 72 (77) 27
2016 43 (1) (35) 7
Per Share (HKD) EPS Diluted EPS DPS BVPS
2014 na na na na
2015 na na na na
2016 0.062 0.062 na 0.131
Balance Sheet (HKD’mn) Non-current assets PPE Itangible assets LT investments & receivables Others Total non-current assets Current assets Inventories Account receivables Bank balances and cash Others Total current assets Total assets Current liabilities Account payables ST borrowings Others Total current liabilities Non-current liabilities LT borrowings Other non-current liabilities Total non-current liabilities Total liabilities Shareholders’ equity Share capital Reserves Total shareholders’ equity Minority interest Total equity
Disclaimer and Risk Statement This document is published by Quam Securities Company Limited ("Quam Securities"), a licensed corporation (CE number AAC577) regulated by the Securities and Futures Commission in Hong Kong. Quam Securities is an affiliate of Quam Limited (0952.hk) and its group of companies (collectively "Quam Group"). This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. In particular but without limitation, neither this document nor any copy hereof may be taken or transmitted into Japan, Canada or the United States or distributed, directly or indirectly, into the United States or to any U.S person (within the meaning of Regulation S under the U.S. Securities Act of 1933) or general public located in Mainland China (but not including people in Hong Kong, Macau and Taiwan). This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. The opinions and/or recommendations of this document do not take into account the recipients' own investment objectives, investment experience, financial situation and other personal circumstances. The recipients of this document shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this document. This document is for informational purpose only and should not be treated as a recommendation on any particular securities, financial instrument, investment portfolio or trading strategy. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions. Opinions and/or recommendations expressed in this document are subject to change without prior notice to all recipients. Quam Group has an investment banking relationship with the issuer within the preceding 12 months from the date of publication of this document. The following analyst hereby certify that their views about the issuer and its securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Tsz Wang POON (CE No. BIB419) and their associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.
PHL (1611 HK)
5
