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Ju Teng International [3336.HK]

Ju Teng International (Ju Teng) is a leading notebook casing manufacturer. Sell-ing pressure on Ju Teng shares triggered by concerns on growth outlook is fad-ing. We share the view that notebook market is not particular exciting, however Ju Teng should deliver solid earnings growth of 0.2%/22.1%/12.4% in 2014E/2015E/2016E given: a) better product mix, b) market share gain and c) improvement in efficiency. Major breakthrough in handset segment, new Mi-crosoft product launch and better than expected notebook shipment are share price catalysts. We believe the de-rating process has come to an end and the 2014 results announcement will prove the group’s solid operating performance. Trading at low end of its historical PER and PBR bands, the negatives have been largely reflected. Ju Teng spent close to HK$120m in buying back 32.5m shares at an average price of HK$3.69 per share since 19 Dec 2014, indicating positive outlook. Initiate with BUY and target price of HK$5.31 (based on 8x 2014E PER, >40% discount to industry average but in line with historical average).

Plastic notebook casing shipment is stabilizing. Despite the weak notebook

market, Ju Teng’s management still believe the group will achieve growth at note-

book casings segment going forward as the group is likely to gain market share in plastic cashing segment after Chongqing plant commenced production in Q4 2014. Chongqing production is on track given orders inflow from ODM customers. Competitive landscape of the plastic casing business is becoming more favorable to Ju Teng. Management is also confident that the Chongqing plant will not drag down overall profitability in 1H 2015 as some pre-operating expenses has been booked in Q4 2014.

Strong support from Microsoft. Ju Teng shares were under heavy selling pres-

sure amid concerns on its growth outlook given: a) high exposure to the notebook market, b) concerns on Surface outlook and c) slow progress in handset casing development. According to management, the group’s notebook customers have

clear products road maps for 2015. The agreement with Microsoft in financing the purchase of production equipment also indicates the software giant is keen on building its own hardware platform, which is positive to Ju Teng.

Handset development is slow but not dragging. Handset segment is only ac-

counted for a small portion of Ju Teng’s turnover and a slow down in growth of global handset shipment should have limited impact on Ju Teng. Ju Teng’s pro-gress of development in handset casing business is slow compared to its peers. However, Ju Teng still sees satisfactory growth at handset casing division and any breakthrough in handset market offers upside surprise.

Mark Po, CFA — Senior Analyst

(852) 3698-6318

markpo@chinastock.com.hk

Wong Chi Man, CFA —Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

TMT - Hardware

A Solid Case. Initiate with BUY

BUY

Close: HK$3.92 (Feb 05, 2015)

Target Price: HK$5.31 (+35.6%)

Share Price Performance

Market Cap US$582m

Shares Outstanding 1,151.6m

Auditor Ernst & Young

Free Float 69.3%

52W range HK$3.20-6.39

3M average daily T/O US$2.0m

Major Shareholding Chen Family

(28.68%)

February 6, 2015

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Turnover (RHS) Price (LHS)

Key Financials

(in HKDm)2012 2013 2014E 2015E 2016E

Rev enue 9,201.3 9,256.8 9,472.1 10,344.3 11,126.4

Change (YoY %) 11.7 0.6 2.3 9.2 7.6

Gross Prof it 1,401.2 1,873.0 1,864.5 2,176.9 2,400.0

Gross Margin % 15.2 20.2 19.7 21.0 21.6

Net Prof it 601.0 762.2 784.8 934.4 1,050.4

Net Margin % 6.5 8.2 8.3 9.0 9.4

EPS (Basic) 0.53 0.66 0.66 0.81 0.91

Change (YoY %) 134.4 24.6 0.2 22.1 12.4

DPS $0.120 $0.150 $0.156 $0.162 $0.182

ROE (%) 11.9 13.1 12.1 13.1 13.3

Div idend Yield (%) 3.06 3.83 3.98 4.14 4.65

PER (x) n.a. 5.9 5.9 4.8 4.3

PBR (x) 0.8 0.7 0.7 0.6 0.5

FCF Yield (%) -15.61% -8.79% 7.52% 19.79% 27.11%

Capex (m) (1,274.8) (1,720.0) (1,560.0) (1,014.0) (918.5)

Free cash f low per share (0.6) (0.4) 0.3 0.8 1.1

Net Gearing (%) 54.2 51.9 51.6 41.1 28.1

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1) Global Notebook Shipment To Stabilize in 2015

IDC estimated PC shipment volume to decline by 2.4% YoY (year-on-year) to 80.8m units in Q4 2014, better than an expected decline of 4.8% YoY. PC shipments totaled 308.6m units in 2014, down 2.1% YoY. US and European market outperformed other markets and reported faster YoY growth in Q4 2014. Asia Pacific ex-Japan market continued to strengthen due to demand form public projects and pick up in consumer demand. Accord-ing to original forecast, IDC projected global PC shipments to drop another 3.3% YoY in 2015 after a 2.4% YoY decline in 2014. However, PC shipment in 2014 is better than IDC estimates as IDC might revise the PC shipment forecasts for 2015. Several reasons sug-gesting that PC shipment in 2015 will stabilize: a) China PC shipment will pick up in 2H 2015, b) launching of 2 in 1 hybrid devices by major brands such as HP, Dell and Lenovo, and c) return of netbook 2.0 & adoption of Chromebook. China, the largest PC market globally, sees sign of stabilization of PC shipment. PC shipment in China declined 3.4% YoY in Q3 2014, narrowed from 12.4% YoY in 2013. Lenovo, the largest PC supplier in China reported 4.8% YoY increase in shipment in China in Q3 2014, the first time it post-ed YoY increase over the past six quarters. Lenovo’s PC shipment rebound is a leading indicator of overall market.

We share the view that some investors may be cautious on Ju Teng’s business given its unexciting outlook for PC market and the group’s high sales exposure to plastic notebook casings segment. However, the latest industry development suggests that outlook for Ju Teng is not as pessimistic as what investors would have expected. According to Digitimes, Quanta is reducing Zhan Yun’s capacity given weak end demand. Trend of building in-house capacity by major notebook ODMs has ended given strong competition from major integrated players like Hon Hai. Major ODMs are now considering to increase outsourcing portion to components makers to maintain competitiveness. Recent news suggested Huan Hsin has withdrawn from notebook casing business amid its huge losses associated with plastic notebook casing due to lack of competitiveness in terms of scale and R&D. Further consolidation of the plastic casing supply chain and higher entry barriers for metal casing business will gradually lead to less competition in notebook casing segment. The change in competitive landscape should help Ju Teng to gain market share and enjoy better pricing which may provide upside for the group’s net profit growth. New production facilities in Chongqing will make positive contribution in 2015 and support Ju Teng’s mar-ket share gain in notebook casing segment. Its operating performance is in line with man-agement’s expectations of orders inflow from ODM customers. Management is also confi-dent that the Chongqing plant will not drag down overall profitability in 1H 2015 as some pre-operating expenses has already been booked in Q4 2014.

With the falling average selling price (ASP) of metal casing notebook computers, a large number of users are attracted by its design and light weight feature. Usage of metal cas-ings in notebook segment is on the uptrend. The metal casing market has long been dom-inated by Catcher and Foxconn Tech. However, competitive landscape has changed since 2012 given ODMs’ vertical integration into metal casing, which resulted in keener competition. Ju Teng has been successfully breaking into metal notebook casing after investing in the last several years in enhancing its capabilities. The group owned a 59/41 JV with Compal Electronics, which handles the magnesium ally thixomolding process used in the production of metal casings. Ju Teng handles the aluminum unibody and stamping pro-cess. Increasing contribution from metal casing also support gross margin improvement in 2015 and beyond. Gross margin of metal casing is as high as 28%, much higher than plastic casing of 16%-17%. We forecast Ju Teng to improve its metal casing portion of total turnover from 22.9% in 2013 and 37.1% in 2016.

Global PC shipment may offer upside surprise

Industry landscape is getting more favorable

Increasing contribution from metal casing

Investment positives

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Figure 1: Global PC shipment

Sources: IDC, WIND, CGIHK Research

Figure 2: Global tablet shipment

Sources: IDC, WIND CGIHK Research

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Global notebook shipment is stabilizing

Figure 3: Global notebook shipment

Sources: IDC, WIND, CGIHK Research

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Metal casing offers high mar-gin

Metal casing is the grow driver

Figure 4: Ju Teng’s turnover and gross profit breakdown in 2013

Sources: Company Data, CGIHK Research

Figure 5: Ju Teng’s turnover mix

Sources: IDC, WIND CGIHK Research

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Plastic casing Metal casing Other Casing

(HK$m)

Plastic casing80%

Metal casing20%

Turnover breakdown in 2013

Plastic casing74%

Metal casing26%

Gross profit breakdown in 2013

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Fuelled by increasing mobile applications, falling ASPs and roll-out of broadband wireless network, smartphone shipments saw rapid growth in 2012-2014. According to IDC’s fore-cast, total global smartphone shipments will grow 26.3% YoY to 1.3bn units in 2014 after a 41.0% growth in 2013. IDC also forecast total smartphone shipments to increase further to 1.9bn by in 2017. IDC expects global smartphone shipments will report 12.2% YoY growth in 2015 and the growth rate will decelerate in 2016-2108. The global smartphone phone shipment is expected to grow at a CAGR of 9.8% in 2014-2018.

In handset casing segment, Catcher, Foxconn Tech, Jabil, Castek, BYDE[0285.HK] and Ju Teng are key players. Catcher, Foxconn Tech and Casetek are strong in metal casings for handset. Apple is the major customer to both Casetek and Catcher. Apple accounted for a major portion of total turnover of Casetek (80% in 2013) and Catcher (40% in 2013). BYDE, Jabil and Ju Teng are able to offer comprehensive casings solution. Traditionally, casing is not a major cost component which accounted for less than 5% of total material costs of handset. It is expected that brands will play more attention on casing given com-moditization of smartphone and hardware specification maturity. Brands are using differ-ent materials or surface treatments as ways to build their brand image or achieving visual differentiation.

Ju Teng put resources on developing composite material technology for producing hand-set casing.. This composite material technology that Ju Teng has been developing for years enables the colour-dyeing process for casing to be done easier than the traditional metal casing. The technology that Ju Teng is using officering customerization of colour which, with 2,000+ possible variations for casing colours. However, development of com-posite material casing is slower than expected. However, Ju Teng is looking growth areas for the composite material casing.

Ju Teng’s progress of new clients acquisition in handset segment is slower than expected. The development with Nokia has been delaying due to the integration with Microsoft. The new projects development with Motorola also delayed due to integration with Lenovo. However, the orders from Asustek for ZenFone is strong. It is expected that orders from Asustek for ZenFone will increase from 8m units in 2014 to 16m units. Orders from Asus-tek is the growth driver to Ju Teng’s handset casing segment. On positive side, handset segment only accounted for a small portion of Ju Teng’s turnover and slow down in growth of global handset shipment should have limited impact on Ju Teng’s operating performance.

Ju Teng is also working with clients such as HTC, Nokia, as well as new models from Motorola. Ju Teng aims to supply plastic casing for HTC, potentially composite casing for Motorola while the casing material for Nokia is still unknown. Management remains posi-tive on the long-term development of its handset cashing segment. Management targets to release more information on the new project development with handset casing segment in late Q1 2015 or Q2 2015. Ju Teng still sees satisfactory growth at handset casing divi-sion and any break-through in handset market offers upside surprise.

Handset market is still growing despite at slower pace

Slow down in handset market has limited impact on Ju Teng

2) Handset market is still growing

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Growing global handset market

Figure 6: Global handset shipment

Sources: IDC, WIND CGIHK Research

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3) Tie up with Microsoft

Ju Teng had entered into two agreements with Microsoft involving CAPEX of HK$661m which is expected for the purchase of CNC machines. The two agreements will cover about 1,000 units of CNC machines to Ju Teng. Ju Teng will need to pay for these ma-chines should Microsoft stop procuring casing products from Ju Teng. Alternatively, if this happens, Ju Teng may deliver these machines to Microsoft in lieu of payments. It is indicated that Microsoft is keen on building up hardware segment despite the fact that Microsoft remains a small player in hardware market. Ju Teng is now the sole sup-plier of Surfacing Pro 3 casing and the group would likely to keep a lion’s share of Mi-crosoft’s purchase of casing products. The agreements with Microsoft will increase Ju Teng’s CNC machine by about one-third to over 4,100 units. Through these arrange-ments, the pressure on Ju Teng’s financial position will be eased.

Microsoft released Q2 FY15 results on 25th Jan 2015. Sales of computing and gaming division was US$4.0bn, higher than market expectations of US$3.75bn. Within this segment, Surface revenue came in at US$1.1bn, up 24% YoY, which is the first time in the history that quarterly sales was over US$1bn. Solid demand for Surface Pro3 and related accessories was the major reason for strong sales growth. Ju Teng has been one of the major magnesium unibody casing suppliers for Microsoft’s Surface tablet since 2013. Thanks to its higher yield rate, more competitive cost structure and better service than its competitors, Ju Teng is now the sole supplier for Surface Pro series in 2015. Microsoft’s CFO also highlighted that Microsoft will continue to promote Surface and expanding sales channel of Surface. The agreement with Microsoft regarding fi-nancing the purchase of production equipment also indicated that Microsoft is keen on building its own hardware platform. Ju Teng’s 1H15 sales is expected to report satis-factory YoY growth on Microsoft’s new tablets. Microsoft is likely to introduce a new Surface tablet with 11” display and a starting price of US$499 to target the education and commercial markets. Microsoft is likely to release 4th generation of Surface later this year for promotion of Windows 10.

Ju Teng, as the sole casing supplier for Surface, will benefit from launching of new products by Microsoft. Given the higher ASP of US$40-US$50 for metal casing of Sur-face, the metal casing will drive overall turnover growth in 2015.

Microsoft is supporting Ju Teng

Microsoft is keen on develop-ing its own hardware platform

Figure 7: Casing materials comparison Sources: Company Data, WIND CGIHK Research

Materials Plastic Magnesium Alloy Magnesium Aluminum Glass Fibre Carbon Fibre

Processing Injection Die casting, thixomolding Unibody Unibody, stamping Injection Thermal plastic, thermal set

Production cost Low Mid Mid to High Mid to High Mid to high High

Thickness 1.5-1.8mm 0.6-0.8mm 0.6-0.8mm 0.6-0.8mm 0.9-1.1mm 0.5-1mm

Strength Mid-to-low High High Mid-to-high Mid-to-high High

Visual quality Mid-to-low High High High Mid-to-high Mid-to-high

Signal interruption No Yes Yes Yes No Yes

Heat dissipation Weak Very good Very good Good Mid Mid

Weight heavy Light Light Mid-to-light Mid to heavy Light

Example Most of entry level devices Dell's Latitude notebooks Surface Macbook, iPad, iPhone Moto X Sony Vaio Pro

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Figure 8: CNC fleet comparison

Sources: Company Data, CGIHK Research

Ju Teng has a sizable CNC ca-pacity

Company No. of CNC machines

Foxconn Tech >20,000

Catcher >20,000

Castek 6,000

BYDE 5,000

Ju Teng 4,000

SZ Everwin 1,500

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Hiccups in 1H2014

Turnover to resume faster growth in 2015

Margins will remain stable

Balance sheet will improve

Earnings forecasts

Ju Teng is projected to deliver earnings growth of 0.2%/22.1%/12.4% in 2014E/

2015E/ 2017E, supported by: a) stabilization of shipment of plastic casing, b) contri-

bution from Chongqing plant, c) increasing contribution from metal casing and d)

improvement in operating efficiency.

Ju Teng’s 1H 2014 results were affected by write-off of product development cost for its tablet customer as the launch of smaller size tablet product was cancelled due to intensify-ing competition at smaller size tablet segment. Ju Teng’s gross margin hit 17.6% in 1H 2014, down 3.2ppt HoH (half-on-half). Ju Teng’s turnover rose 2.3% YoY in 1H 2014 to HK$4,399m and slower turnover growth was mainly due to slower than expected contribu-tion from handset casings for handsets. Due to opening of new production facilities in Chongqing, S,G&A expenses rose 20.7% YoY in 1H 2014 which put pressure on the group’s profitability in 1H2014.

Notebook casing shipments growth in 2014 were constrained by weak global end demand. However, the group’s increasing market share in the plastic casing segment should support shipment growth in 2015. The launching of new hardware products by Microsoft creates growth opportunity to Ju Teng in metal casing segment. After slower turnover growth in 2013 and 2014, we expect Ju Teng’s revenue growth in 2015 and 2016 to be driven by: a) contribution from facilities in Chongqing, b) ramp-up of metal casing shipments, c) pick up in orders from Microsoft and d) stabilization of plastic casing shipments. We expect Ju Teng’s turnover to report 9.2% YoY and 7.6% YoY increase in 2015 and 2016, improved from 2.3% in 2014 and 0.6% in 2013. Given better supply and demand dynamic, we be-lieve that ASP of Ju Teng’s products will remain stable in 2014-2016.

Gross margin is expected to improved from 19.7% in 2014 to 21.6% 2016 on a better prod-uct mix from increasing proportion of metal casings, higher production yield of metal casing and higher efficiency in production plant in Chongqing. Gross margin of metal casing is estimated at 28%, much higher than 16%-17% of plastic casing. The portion of metal cas-ing as percent of total turnover is expected to increase from 22.9% in 2013 to 37.1% in 2016. With its growing scale and improving production efficiency, the company is expected to keep operating expenses well-controlled at about 7-8% of sales in 2014-16. Operating margin is expected to improve given tight control over operating expenses and gross mar-gin improvement.

Ju Teng has been in a net debt position since 2008 as high capex is required for metal and composite material casings. Capex was high in 2009-2013 due to metal and composite material casing machines, surging from about HK$555m in 2008 to HK$1,641m in 2009 and further to over HK$1,719m in 2013. After a significant investment outlay in 2010-13, Ju Teng's capex is expected to peak in 2013. The group’s CAPEX is about HK$1,014m for 2015 due to expansion of the metal and composite material casings business and the same amount is expected to be seen again in 2016 due to further expansion. We also ex-pect Ju Teng’s net gearing ratio to come down from the peak of 54.2% in 2013 to 28.1% in 2016.

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Figure 9: Key assumptions for Ju Teng

Sources: Company, CGIHK Research

2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

Turnover (HKDm)

Plastic casing 7,249.2 7,463.9 7,166.2 7,411.1 7,361.1 6,772.2 6,433.6 6,433.6 6,433.6

Metal casing 0 0 0 823.5 1,840.3 2,116.3 2,645.4 3,439.0 4,126.8

Other Casing 0 0 0 0 0 368.4 393.1 471.7 566.1

Total 7,249.2 7,463.9 7,166.2 8,234.5 9,201.3 9,256.8 9,472.1 10,344.3 11,126.4

YoY Change (%)

Plastic casing 3.0 (4.0) 3.4 (0.7) (8.0) (5.0) 0 0

Metal casing 123.5 15.0 25.0 30.0 20.0

Other Casing 6.7 20.0 20.0

Total 3.0 (4.0) 14.9 11.7 0.6 2.3 9.2 7.6

Gross margin (%)

Plastic casing 16.7 18.0 12.9 10.0 14.0 17.0 15.5 16.5 16.5

Metal casing 28.0 15.0 20.0 28.2 28.2 28.2 28.2

Other Casing 14.0 0 0 34.0 31.0 31.0 31.0

Net margin (%) 16.7 18.0 12.9 10.5 15.2 20.2 19.7 21.0 21.6

Cost (HKDm)

S,G&A (391.3) (405.1) (479.7) (576.0) (624.4) (682.6) (668.2) (746.2) (811.2)

Financial Expenses (19.6) (14.3) (27.9) (53.8) (54.3) (32.7) (42.3) (51.4) (60.4)

YoY Change (%)

S,G&A 3.5 18.4 20.1 8.4 9.3 (2.1) 11.7 8.7

Financial Expenses (27.2) 95.5 92.8 0.9 (39.7) 29.2 21.5 17.4

Volume shipment (m units)

Plastic casing 40.00 45.00 56.00 58.00 60.00 51.00 57.51 61.39 64.76

Metals casing 9.00 10.35 12.94 16.82

Volume shipment YoY Change (%)

Plastic casing 12.5 24.4 3.6 3.4 (15.0) 12.8 6.7 5.5

Metals casing 15.0 25.0 30.0

ASP (HK$)

Plastic casing 144.3 144.3 144.3 144.3 144.3

Metals casing 204.5 204.5 204.5 204.5 204.5

ASP YoY Change (%)

Plastic casing 0 0 0 0

Metals casing 0 0 0 0

CAPEX (HKDm) (555.2) (1,641.1) (964.2) (1,379.1) (1,274.8) (1,720.0) (1,560.0) (1,014.0) (918.5)

Net Gearing (%) 50.6 37.2 28.5 41.5 54.2 51.9 49.3 38.7 26.2

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Figure 10: Earnings projection

Sources: Company, CGIHK Research

Income Statement (HKDm) FY2012 FY2013 FY2014F FY2015F FY2016F Cash Flow Statement (HKDm) FY2012 FY2013 FY2014F FY2015F FY2016F

Revenue 9,201 9,257 9,472 10,344 11,126 Net Income 843 1,188 1,232 1,431 1,588

Growth yoy% 11.7% 0.6% 2.3% 9.2% 7.6% Depreciation & Amort. 589 668 772 839 900

Gross Profit 1,401 1,873 1,865 2,177 2,400 Change in Working Capital (882) (551) (79) (320) (287)

Growth yoy% 61.5% 33.7% (0.4%) 16.8% 10.2% Cash from Ops. 550 1,304 1,925 1,951 2,202

Selling General & Admin Exp. (624) (683) (668) (746) (811) Capital Expenditure (1,275) (1,720) (1,560) (1,014) (919)

Others Operating Expenses/Items 67 (3) 36 1 (1) Sale of Property, Plant, and Equipment - - - - -

Operating Income 843 1,188 1,232 1,431 1,588 Change in Investing Acitivities (69) 428 (156) (50) (56)

Growth yoy% n.a. n.a. 3.8% 16.1% 10.9% Cash from Investing (1,344) (1,292) (1,716) (1,064) (975)

Interest Expense (62.0) (61.8) (108.5) (114.8) (109.2) Net increase in bank borrow ings 1,460 216 594 280 (249)

Interest and Invest. Income 6.8 6.2 8.3 12.4 15.2

Income/(Loss) from Affiliates 0 0 0 0 0 Issuance of Common Stock 39 17 0 0 0

Other Non-Operating Inc. (Exp.) 0 0 0 0 0 Common Dividends Paid (90) (138) (175) (181) (187)

Impairment of Goodw ill - - - - - Special Dividend Paid - - - - -

Gain (Loss) On Sale Of Invest. - - - - - Other Financing Activities (140) (247) (275) (297) (313)

Gain (Loss) On Sale Of Assets - - - - - Cash from Financing 1,269 (152) 144 (197) (748)

Income Tax Expense (129) (255) (233) (260) (292)

Minority Int. in Earnings (59) (115) (115) (135) (151) Net Change in Cash 476 (140) 354 690 478

Net Income 601 762 785 934 1,050

Growth yoy% 134.2% 26.8% 3.0% 19.1% 12.4%

Balance Sheet (HKDm) FY2012 FY2013 FY2014F FY2015F FY2016F Ratios FY2012 FY2013 FY2014F FY2015F FY2016F

ASSETS Profitability

Cash And Equivalents 1,163 1,061 1,413 2,101 2,578 Return on Assets % 4.9% 5.5% 5.1% 5.6% 5.9%

Receivables 1,902 1,977 2,023 2,209 2,376 Return on Capital % 7.9% 8.2% 8.1% 8.6% 8.9%

Inventory 3,239 3,954 4,046 4,418 4,752 Return on Equity % 11.9% 13.1% 12.1% 13.1% 13.3%

Other Current Assets 58 24 26 0 0

Total Current Assets 6,363 7,016 7,508 8,729 9,706 Margin Analysis

Net Property, Plant & Equipment 6,193 7,291 8,079 8,254 8,272 Gross Margin % 15.2% 20.2% 19.7% 21.0% 21.6%

Long-term Investments - - - - - SG&A Margin % 6.8% 7.4% 7.1% 7.2% 7.3%

Other Intangibles - - - - - EBIT Margin % 9.2% 12.9% 13.1% 14.0% 14.4%

Deferred Tax Assets, LT - - - - - EBITDA Margin % 15.7% 20.1% 21.3% 22.1% 22.5%

Other Long-Term Assets 693 412 433 447 462 Net Income Margin % 6.5% 8.2% 8.3% 9.0% 9.4%

Goodw ill - - - - -

Accounts Receivable Long-Term - - - - - Asset Turnover

Total Long Term Assets 6,886 7,702 8,513 8,701 8,734 Total Asset Turnover 0.7x 0.6x 0.6x 0.6x 0.6x

Total Assets 13,249 14,718 16,021 17,430 18,440 Fixed Asset Turnover 1.3x 1.2x 1.1x 1.2x 1.3x

Accounts Receivable Turnover 5.3x 4.8x 4.7x 4.9x 4.9x

LIABILITIES & EQUITY Inventory Turnover 2.8x 2.3x 2.3x 2.3x 2.3x

Accounts Payable 2,373 2,539 2,598 2,837 3,052

Accrued Exp. - - - - - Liquidity

Short-term Borrow ings 2,499 2,664 3,045 3,326 3,077 Current Ratio 1.3x 1.3x 1.3x 1.4x 1.5x

Curr. Port. of LT Debt - - - - - Quick Ratio 0.4x 0.4x 0.4x 0.5x 0.6x

Curr. Income Taxes Payable - - - - - Avg. Days Sales Out. 75.5 77.9 77.9 77.9 77.9

Unearned Revenue, Current - - - - - Avg. Days Inventory Out. 128.5 155.9 155.9 155.9 155.9

Other Current Liabilities 173 242 266 288 317 Avg. Days Payable Out. 119.1 121.4 123.2 121.4 123.2

Total Current Liabilities 5,045 5,445 5,909 6,451 6,445 Avg. Cash Conversion Cycle 132.9 173.3 171.9 175.3 176.6

Long-Term Debt 1,583 1,634 1,847 1,847 1,847 Net Debt to Equity 54% 52% 52% 41% 28%

Def. Tax Liability, Non-Curr. 5 6 7 8 9

Other Non-Current Liabilities 0 0 0 0 0 Growth Over Prior Year

Total Liabilities 6,633 7,085 7,763 8,305 8,301 Total Revenue 11.7% 0.6% 2.3% 9.2% 7.6%

Common Stock 115 117 116 115 115 Net Income 134.2% 26.8% 3.0% 19.1% 12.4%

Additional Paid In Capital - - - - - Payout Ratio % 35.2% 22.6% 22.6% 23.5% 20.0%

Retained Earnings 5,271 6,119 6,629 7,362 8,226

Treasury Stock - - - 0 0

Comprehensive Inc. and Other - - - - -

Minority Interest 1,230.5 1,397.2 1,511.9 1,646.4 1,797.7

Total Equity 6,617 7,633 8,257 9,124 10,139

Total Liabilities And Equity 13,249 14,718 16,020 17,429 18,439

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De-rating process comes to an end

Should deserve a higher valua-tion

Valuation

Ju Teng is a leader in plastic casings with a 30% global market share. The group has trad-

ed at a sizeable valuation discount since 2011 due to its high exposure to the notebook

segment, and has been lagging behind peers in the metal casing business. Ju Teng is suc-

cessfully diversifying away from its traditional plastic notebook casing business.

We maintain the view that Ju Teng is a solid hardware play with a growth story. The volatile

share price performance in 2014 which is mainly due to weak market sentiment and lower

than expected 1H 2014 results. However, the coming 2014 annual results announcement

will be a proof of the group’s solid operating performance. Despite the hiccups in 2014, the

group’s top-line and bottom-line growth are expected to accelerate in 2015 when the new

Sichuan factory starts contributing. Given an improvement in fundamentals including lower

gearing, rising ROE & profitability, the stock deserves a higher valuation. We’ve seen the

market downgraded Ju Teng owing to the potential 2H 2014 earnings miss. Ju Teng will

report its 2H 2014 results in Mar 2015. However, as the downgrades come to an end and

we don’t expect any negative surprise from 2014 results announcement. We expect the

share to gradually rebound to price in its strong sales in 1H 2015.

Ju Teng has been buying back shares for shareholders’ interests. In Q4 2014 Ju Teng

bought back 32.5m shares since 19 Dec 2014 with an average price of HK$3.69 per share

which indicates management remains positive on the outlook.

The stock is trading at 5.9x 2014E PER and 4.8x 2015E PER, which we think is underval-

ued vs its casing component peers (12.6x and 10.6x on average). We are initiating cover-

age on Ju Teng with a BUY rating and target price of HK$5.31 based on 8x 2014E PER

(discount to average of peers of 15.1x but in line with historical average of 8.0x). .

Figure 11: Ju Teng PER trend

Sources: Bloomberg, CGIHK Research estimates

0

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10

12

Oct-09

Feb-10

May-10

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Mar-11

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11x

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14

Figure 12: Peer comparison

Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks

Ticker Company PE EV/EBITDA

Price Market Cap 2014F 2015F 2016F 2014F 2015F 2016F 2013 2014F 2013 2014F 2013 2014F 2013 2014F 1M 3M 6M 12M

Lcy US$m x x x x x x x x % % % % % % % % % %

3336 HK Ju Teng International Hldgs 3.9 582.2 5.9 5.2 4.8 5.2 4.5 4.1 0.7 0.7 13.1 11.4 5.7 5.2 3.8 4.0 1.6 -9.0 -25.8 -23.1698 HK Tongda Group Holdings Ltd 1.0 726.5 11.6 9.1 7.5 8.1 6.4 5.3 1.8 1.6 15.8 15.7 7.6 8.8 2.5 2.7 12.0 2.0 -11.2 21.2285 HK Byd Electronic Intl Co Ltd 7.7 2237.7 12.9 9.7 8.2 5.8 4.5 4.0 1.5 1.4 7.6 11.4 6.5 7.8 0.5 0.8 -3.9 -11.8 26.9 92.5838 HK Eva Precision Industrial Hld 1.9 418.4 12.5 9.7 7.3 6.6 5.3 4.1 1.4 1.3 2.7 11.8 3.5 5.8 1.5 2.3 -0.5 -8.9 1.6 96.82038 HK Fih Mobile Ltd 3.5 3526.3 21.6 15.6 14.1 2.7 2.3 2.1 0.9 0.9 2.2 4.0 2.0 3.2 0.0 0.0 1.2 -13.5 -22.3 -4.9732 HK Truly International Holdings 2.9 1102.3 6.6 5.6 4.9 4.7 4.0 3.5 1.3 1.1 27.3 15.7 9.1 7.0 7.1 4.6 -4.9 -24.2 -35.2 -29.82018 HK Aac Technologies Holdings In 51.3 8117.0 20.8 16.7 14.5 16.2 12.9 11.2 6.3 5.4 36.9 27.7 24.3 20.6 2.1 1.8 23.9 12.1 5.5 52.52382 HK Sunny Optical Tech 10.9 1536.5 16.2 12.5 10.3 11.2 8.8 7.3 3.2 2.9 18.5 18.4 10.6 10.7 1.4 1.7 -18.5 -18.8 7.5 77.5992 HK Lenovo Group Ltd 11.6 16591.0 18.7 15.2 11.8 10.8 9.0 7.2 4.0 4.0 25.3 23.7 3.6 4.2 2.1 2.0 15.1 1.9 7.4 36.1Average 15.1 11.8 9.8 8.3 6.6 5.6 2.5 2.3 17.0 16.0 8.4 8.5 2.1 2.0 3.1 -7.7 -2.5 42.72474 TT Catcher Technology Co Ltd 285.0 6932.4 13.1 11.4 10.3 7.0 5.9 5.1 2.6 2.5 20.5 20.5 13.7 14.7 n.a. 2.4 14.2 9.6 12.6 41.85264 TT Casetek Holdings Ltd 173.0 1862.7 11.1 9.5 7.9 5.4 4.3 3.7 2.3 2.1 29.8 20.9 13.4 12.4 n.a. 4.2 -3.6 -7.7 -3.1 10.52354 TT Foxconn Technology Co Ltd 84.3 3678.5 14.0 12.9 12.8 7.4 6.6 6.5 1.6 1.3 10.8 11.0 7.0 7.8 n.a. 1.4 -1.7 3.3 22.3 33.72356 TT Inventec Corp 23.9 2717.6 12.4 11.6 11.6 6.6 7.0 6.5 1.6 1.5 13.5 11.3 3.6 3.1 n.a. 5.6 11.4 12.5 -4.8 -10.22324 TT Compal Electronics 23.0 3223.1 18.0 10.3 9.3 7.0 6.4 5.8 1.1 1.1 2.5 6.1 1.5 1.6 n.a. 4.1 1.8 8.0 -17.5 10.52383 TT Elite Material Co Ltd 43.1 428.4 10.9 10.3 n.a. 6.3 5.7 n.a. 1.8 1.9 12.7 17.8 7.6 8.7 n.a. 4.2 5.8 15.7 24.6 66.12357 TT Asustek Computer Inc 330.5 7780.7 12.1 11.2 10.7 8.0 7.4 7.1 1.7 1.7 16.4 14.5 7.1 7.1 n.a. 5.6 -4.1 7.1 4.1 18.23231 TT Wistron Corp 29.4 2296.2 15.6 10.9 9.5 8.5 6.7 6.0 1.1 1.1 9.0 6.9 1.3 1.7 n.a. 4.9 2.1 -3.0 -0.5 21.22353 TT Acer Inc 20.3 1992.4 33.3 27.6 26.6 9.1 8.7 8.5 1.0 1.0 -31.5 2.8 -3.3 0.9 n.a. 0.4 -4.0 -0.5 -15.2 18.8Average 15.6 12.9 12.4 7.3 6.5 6.1 1.6 1.6 9.3 12.4 5.8 6.4 n.a. 3.6 2.4 5.0 2.5 23.4300115 CH Shenzhen Everwin Precision-A 21.5 1773.4 33.4 23.0 16.8 19.8 15.1 11.2 5.9 5.2 14.0 16.7 10.1 11.8 n.a. 0.5 19.5 5.9 6.4 14.2300083 CH Janus Dongguan Precision-A 23.6 758.2 79.8 22.2 18.3 n.a. n.a. n.a. 3.3 n.a. 9.4 3.9 2.1 2.2 n.a. 0.4 23.8 -0.7 33.6 18.4300328 CH Dongguan Eontec Co Ltd-A 36.2 647.7 73.8 39.7 25.3 57.3 33.4 21.9 7.0 6.5 8.3 8.9 6.8 n.a. 0.3 n.a. 20.3 -2.6 51.9 76.8002426 CH Suzhou Victory Precision-A 10.2 1599.8 56.4 22.6 16.4 n.a. n.a. n.a. 3.4 n.a. 8.5 5.9 4.2 n.a. n.a. 0.3 5.6 -9.9 11.1 25.6Average 60.9 26.9 19.2 38.6 24.2 16.6 4.9 5.9 10.0 8.9 5.8 7.0 0.3 0.4 17.3 -1.8 25.8 33.8060720 KS Kh Vatec Co Ltd 37700.0 553.3 20.8 8.7 7.1 9.7 5.3 4.5 2.3 2.2 26.9 11.3 5.1 n.a. n.a. 0.8 -13.5 10.2 101.1 50.2JBL US Jabil Circuit Inc 21.0 4053.8 10.4 9.0 8.6 4.3 3.9 4.0 1.8 1.7 16.7 14.0 2.2 5.2 1.5 1.6 -1.4 -0.5 4.8 20.8HIP SP Hi-P International Ltd 0.7 418.3 69.0 17.3 n.a. 5.3 4.0 n.a. 1.0 0.9 1.1 1.6 -1.8 1.0 n.a. 1.9 -4.8 1.5 7.0 31.4Average 40.2 15.5 11.6 14.5 9.4 8.4 2.5 2.7 13.7 8.9 2.8 4.4 0.9 1.2 -0.6 2.4 34.6 34.0

ROE ROA Div yield Share Price PerformanceP/B

15

Major Risk Factors

Lower than expected global notebook shipment. Plastic notebook casing account-

ed for a major portion of the group’s turnover. Lower than expected global notebook

shipment might have negative impact of Ju Teng’s operating performance.

Microsoft stops promoting Surface. Ju Teng is now the sole supplier of casing for

Surface. Microsoft’s change in strategy of hardware will have negative impact on Ju

Teng’s future growth.

16

Company Background

Ju Teng was founded in 2000, listed in Hong Kong in 2005, and listed as a TDR in Tai-wan in May 2009. It has about 30% global market share in the casing market, followed by Hon Hai and Huan Hsin. It has production plants in China and Taiwan. Its major end clients are global brands and ODMs including Lenovo, HP, Dell, Asustek, Acer, Sam-sung, Quanta, Compal, Wistron, Inventec and Pegatron. Ju Teng offers full range of casing solutions including plastic, aluminium, magnesium, carbon/glass fiber and com-posite materials.

Plastic casing is the major top line contributor which accounted for about 73.2% of total turnover in 2013. Metal casing accounted for 16.8% of total turnover in 2013. Ju Teng has started to make inroads to tablet and smartphone casings in recent years.

In order to reduce operational risks for slow notebook demand, management turned aggressive in diversifying its product portfolio from plastic casings to metal casings for notebook. The company has also expanded its business scope from notebook to tab-let and smartphone since 2012, helping reduce its sales exposure to notebook busi-ness from 88% in 2012 to 61% in 2016.

Figure 13: Development of Ju Teng

Sources: Company Data, CGIHK Research

2000: Ju Teng

International was

founded.

2002:

Suzhou Dazhi

was founded

in Suzhou.

2005: Listed

in HKEX Stock

Code - (3336)

2007:

WIS Precision.

2008: Acquired

71% stake in

Lian-Yi

precision

2011: Established

Neijiang

production base.

2001: Everday

Computer was

founded in

Suzhou.

2004:

Acquired

Ju Teng

Electronics

(Shanghai)

2006:

Chengyang

Precision

(Kushan) was

formed.

2008:

CPM Co. Ltd.

(Nanjing) was

formed.

2009:

Listed TDR in

Taiwan

17

Company Background

Figure 14: Ju Teng’s client base

Sources: Bloomberg, CGIHK Research

Figure 15: Ju Teng’s corporate structure

Sources: Bloomberg, CGIHK Research

18

Appendix: Selected management profile

Management Team

Name Title Experience

Cheng Li-Yu Chairman Mr. Cheng is one of the founders of the Group. He started working at San Li Industrial Company Limited which is

engaged in spray painting 27 years ago.

Cheng Li-Yen Executive director Mr. Cheng is also one of the founders of the Group. He started working at San Li Industrial Company Limited which

is engaged in spray painting over 21 years.

Huang Kuo-Kuang Executive director Mr. Huang joined the Group in 2001 as a member of the Group’s senior management. He has more than 20 years’

experience in the computer industry.

Hsieh Wan-Fu Senior VP Mr. Hsieh joined the Group in 2003. He is responsible for the establishment of quality control system, supervision of

the Group’s production in spray painting, technology in dust-free spray painting.and both development and

promotion of new

Lo Jung-Te Senior VP Mr. Lo joined the Group in 2004. He is responsible for the supervision of the manufacture and development of the

Group’s automatic moulding.

Tsui Yung Kwok CFO Mr. Tsui holds a MA in corporate governance and a BA in business (Accounting). He is also a member of the

Institute of Chartered Accountants in Australia, Institute of Certified Public Accountants and the Hong Kong Institute

of Chartered Secretaries.CPA Australia, the Hong Kong

Figure 16: Ju Teng’s management team

Sources: Company Data, CGIHK Research

Figure 17: Ju Teng’s shareholding structure

Sources: Bloomberg, CGIHK Research

Name Shares (m) % of total share outstanding

Cheng Family (Chairman related) 330.3 28.7

Templetion Asset Management Ltd. 82.9 7.2

Alliance Berstein LP. 70 6.1

Other 668 58.0

19

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :