20180820-信达国际控股-东江集团控股-02283.HK-Don_t_worry,_Buy_on_dips_7页_771kb

TK Group (Holdings) Limited (2283 HK) Summary

Core Content

TK Group (Holdings) Limited is a leading one-stop total plastics solutions provider in the PRC, offering design and fabrication of plastic injection molds and manufacturing of plastic components. The company has notable clients such as Apple, Google, Jabra, Philips, Polycom, and major German automobile brands. It ranked second in the PRC for revenue from mold fabrication in 2012.

Main Points and Key Information

Financial Performance and Outlook

• 1H18 Results:

  • Revenue and net profit increased by 25.7% and 27.1% to HK$1,025mn and HK$140mn, respectively, aligning with 46% and 35.6% of FY18E forecasts.
  • Gross Margin (GM) declined by 80bps to 31.5% in 1H18, mainly due to RMB appreciation (100bps) and initial investment (80bps).
  • Molding fabrication GM rose by 190bps to 36.7%, while plastic products GM dropped to 28.9%.

• Future GM Expectations:

  • 2H18 GM is expected to improve due to RMB depreciation and mass production of new customer projects.
  • Smart home devices revenue surged by 145% YoY to HK$109.9mn in 1H18, representing ~11% of total revenue, driven by Google Home and Nest consolidation, and new client acquisition.

• CAPEX Guidance:

  • FY18E CAPEX is raised to ~HK$400mn (vs. ~HK$230mn in March 2018), with 75% allocated to plastic products capacity expansion and automation.
  • The company is actively seeking M&A opportunities to expand its capacity and enhance its market position.

• Revenue Growth Forecasts:

  • FY18E revenue is forecasted at HK$2,228mn, with ~20% revenue growth expected.
  • FY19E revenue is forecasted at HK$2,590mn, and FY20E at HK$3,061mn, showing a 18.2% YoY growth for FY18E to FY20E.

Earnings and Profitability

• Earnings Forecast (Exhibit 1):

  • FY18E net profit is forecasted at HK$382mn, and FY19E at HK$464mn, with a ~3.3% and ~3.2% decrease in EPS respectively.
  • EPS growth is expected at ~23.0% CAGR from FY17 to FY20.

• Profit Margins:

  • Group GM is forecasted to rise from 34.6% in FY18E to 36.1% in FY20E.
  • Net margin is projected to increase from 17.1% in FY18E to 18.4% in FY20E.

Investment Recommendation

• Rating: Maintain BUY.
• Target Price (TP): Revised to HK$7.52.
• Upside: 34.1% from the current price of HK$5.61.
• PE Ratio: FY19E 10.0x (approximately 23% discount to Hong Kong and international peers).
• Advice: Investors should accumulate on dips due to solid fundamentals and attractive valuation.

Market and Risk Factors

• Market Concerns:

  • US-China trade war may impact automotive molding in the US, which accounts for ~8% of total sales.
  • Despite this, order flow in July remained stable, and US clients are willing to share increased tariffs with TK.

• Downside Risks:

  • Escalating trade tensions.
  • Global economic slowdown.
  • Short-term plastic production orders and potential supplier switching.
  • Lack of raw material choice and competition from overseas players.
  • Rapid technology changes and declining customer leadership.
  • Secondary market liquidity risk and RMB appreciation.

Comparative Analysis (Exhibit 8)

• Peers Comparison:
  • Mkt Cap and PE data show that TK is undervalued compared to peers, with a 10.0x PE in FY19E.
  • ROE and ROA are expected to remain strong, at 34.2% and 20.2% in FY18E, respectively.
  • Net gearing is at ~44.0% in FY18E, indicating a balanced capital structure.

Balance Sheet and Cash Flow

• Balance Sheet:

  • Total assets are projected to grow from HK$1,403mn in FY16A to HK$2,668mn in FY20E.
  • Shareholders’ equity is expected to increase from HK$685mn to HK$1,661mn.

• Cash Flow:

  • Free cash flow is projected to rise from HK$172mn in FY16A to HK$429mn in FY20E.
  • Net cash (debt) at year-end is forecasted to increase from HK$299mn to HK$819mn.

Valuation and Ratios

• 12-month forward P/E is shown in Exhibit 10.
• Key Ratios:
  • ROE: 30.0% in FY16A, expected to rise to 34.2% in FY18E.
  • ROA: 14.7% in FY16A, expected to reach 21.1% in FY20E.
  • Net gearing: from -43.7% to -49.3%, indicating a stable debt position.

Conclusion

TK Group (Holdings) Limited is a solid player in the plastics industry, showing strong revenue and net profit growth in 1H18. The company is expected to benefit from RMB depreciation, new customer ramp-up, and automation enhancements. Despite some risks like trade tensions and technology shifts, the revised target price and undemanding PE suggest a good investment opportunity. The recommendation to accumulate on dips is based on positive growth forecasts and strong financial position.