20131015-高盛-Forging_a_path_from_small-cap_to_mid-cap__initiate_with_CL-Buy_29页_800kb

Summary of Merry Electronics Investment Report

Core Content

Merry Electronics is being recommended for a "Buy" rating and added to the Goldman Sachs Asia Pacific Conviction Buy List. The report highlights the company's potential to grow from a small-cap to a mid-cap stock, with a target price of NT$132, implying a 59% share price upside from the current price of NT$83.70.

Main Viewpoints

• Market Position: Merry is recognized as a rising star in the global acoustic and accessories market, leveraging its 40 years of industry experience and substantial R&D investment.
• Earnings Growth: The company is expected to see strong earnings growth in 2014E and 2015E, with EPS growth rates of 91.6% and 42.4% respectively, significantly above the Bloomberg consensus.
• Product Mix Transition: The company has shifted its focus from low-margin handsfree products to higher-margin segments such as speakers and mid-high end headphones, which are projected to drive sales growth and margin expansion.
• Apple Collaboration: Merry has secured a significant design win with Apple's Mac series, which is seen as a key driver for future growth. The report suggests that the company may expand its Apple product portfolio, including iOS devices, which could lead to a more diversified revenue base.
• Valuation Methodology: The valuation is based on the P/B-ROE approach, using a 3.7X multiple of 2014E P/B to derive the target price. This implies a 16.3X P/E for 2014E, slightly above its historical average of 15.5X.
• Segment Growth: The Speaker and Entertainment segments are identified as the main growth drivers, with projected CAGRs of 92% and 32% respectively for 2013-2015E.

Key Information

• Current Market Cap: NT$14,713.5 million / US$500.4 million
• EPS Growth: 52.7% in 2013E, 91.6% in 2014E, 54.6% in 2015E
• ROE Growth: Expected to rise from 19% in 2013E to 28% in 2015E
• P/B Multiple: Currently at 2.3X, with a target of 4X in the next 1-2 years
• Dividend Yield: Currently at 3.5%, expected to increase to 6.7% in 2015E
• Free Cash Flow Yield: Projected to rise from -0.8% in 2013 to 9.9% in 2015E
• CROCI: Expected to grow from 25% in 2013E to 37% in 2015E
• Segment Contributions: Speaker and Entertainment segments are projected to account for 73% of total sales by 2015E

Investment Catalysts

• Earnings Growth: Strong expected earnings growth in 2014E and 2015E
• Market Share Expansion: Potential to gain more market share in PC speaker boxes and mid-high end earphones
• Smart Device Penetration: Leveraging its track record to enter the smart device market, which offers a larger TAM and higher margins
• Supplier Diversification: OEMs may look to diversify their supplier base, providing opportunities for Merry to establish itself as an emerging player

Key Risks

• Slower Share Gain and Design-Wins: Potential for slower than expected market share growth and design wins
• Cost Increases: Risks from rising raw materials and labor costs

Competitive Analysis

• Positioning: Merry is positioned as a potential third player in the Apple supply chain, behind AAC Technologies and GoerTek
• Diversification: Offers a more diversified product mix compared to other Apple-centric suppliers, which may lead to stronger long-term growth

Financial Highlights

• Revenue Growth: Projected to grow significantly, with total revenue expected to reach NT$16,767.8 million by 2015E
• Margin Expansion: Gross margin is expected to rise from 19% in 2013E to 24.3% in 2015E
• EBITDA Growth: Projected to grow from NT$704.0 million in 2013E to NT$2,838.0 million in 2015E
• Net Income Growth: Expected to grow from NT$481.2 million in 2013E to NT$2,030.1 million in 2015E

Analyst Contributors

• Robert Yen: rob.yen@gs.com
• Iris Wu: iris.wu@gs.com
• Bicky Lee: ricky.lee@gs.com

Summary Table

Metric	2013E	2014E	2015E
EPS (NT$)	5.24	8.11	11.55
EPS Growth (%)	91.6%	54.6%	42.4%
P/E (X)	16.0	10.3	7.2
P/B (X)	2.9	2.3	1.8
ROE (%)	19.2	24.9	28.2
CROCI (%)	24.9	31.6	36.5

Valuation Outlook

• Target Price: NT$132, implying 59% upside from current price
• P/B-ROE Methodology: Based on historical multiples and projected ROE
• P/B Multiple: Expected to rise from 2.3X to 4X, leading to a higher valuation

Conclusion

Merry Electronics has a clear path to growth, driven by its transition to higher-margin products, strong performance with Apple, and potential expansion into smart devices. The report suggests that the company's valuation is likely to re-rate upwards as it achieves its earnings and market share targets.