Excerpts from analysts' reports

Renfred-TayAmFraser analyst: Renfred Tay (left)

Better productivity through automation. We recently visited Valuetronics’ manufacturing plants in Daya Bay and Danshui, both near Shenzhen, PRC, and were impressed with the degree of automation being used (some made in‐house by its engineers and some together with its customer). 

These processes have not only rationalised the number of head count needed (head count over the last 3 years remained stable at around 4000 employees in spite of revenue growth), but also improved yield, output rate and reduced the floor space needed.

1Valuetronics_visit7.14Main production block at Daya Bay. Photo: AmFraserEven at current automation levels, we still saw pockets of areas that could still be further automated.  

Flexible production lines. We were also impressed with the flexibility of their production lines.

Workstations on production lines could easily be rearranged very quickly when needed.

Valuetronics has consistently shown superior net margins (5‐6%) vis‐à‐vis its other EMS peers (1‐3%) and we expect this key competitive advantage to be maintained in the coming years. 

No shop floor bottle necks in sight that could hinder growth. Our plant visit confirmed that there were empty plots of land at the Daya Bay facilities that could be used to build another production plant.  

2Valuetronics_visit7.14Soldering still done manually, implying room for more automation should volumes permit it. Photo: AmFraserHowever, with constant productivity improvements, which also save space, management currently maintains that there is still no need to build on the empty plots of land at Daya Bay for the next couple of years as there is still idle shop floor space at the existing plant.

Over at the Danshui plant (fully dedicated to its big customer for LED lamp production), we were told that there were ample factory floor space in the surrounding vicinity that could be still be leased.  All Valuetronics has to do is bring in the necessary machines to increase output.   

Further upside expected. Although Valuetronics has risen 23% since our initiation on 1 July 2014, there is still a sizable upside of 41% to our conservative DCF‐based target price of S$0.69. Our target implies FY15F PE of 10x or ex‐cash PE of 6.7x.

This target is not demanding in our view given our expectation of about 10% bottom‐line CAGR for the next 3 years. We make no changes to our earnings estimates and maintain our BUY rating on Valuetronics.

Recent story:  
VALUETRONICS (43 c): Trading at only 2.9X ex-cash

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