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Investor Notes - Phillip Securities (HK) Ltd
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19 Jun, 2019 (Wednesday)

Q TECH(1478)
Q Tech issued a positive profit warning. It is expected that the Group will record a consolidated profit attributable to the Shareholders before tax of RMB150 million to RMB180 million for the six months ended 30 June 2019, as compared to a loss of RMB51.29 million over a year ago, due to the following factors: (i) the gross profit margin of overall products improved apparently due to a significant increase of sales volumes of camera modules and the enhancement of product mix of fingerprint recognition module products; (ii) the labour cost has improved, which was mainly attributable to the upgrading of the production automation that has gradually demonstrated results; and (iii) Newmax Technology Co., Ltd., an associated company of the Company, has significantly improved its managing situation for the period from January 2019 to April 2019 and has recorded a profit.
Buy-in Price: $5.50, Target Price: $7.80, Cut Loss Price: $4.30

Nitori Holdings Co., Ltd. (9843.JT)
Nitori Holdings Co., Ltd. was founded in 1967. It carries out the planning and retail of furniture and interior goods, the coordination of newly-built housing, and the retail business of overseas imported goods and overseas-developed products. From product planning and procurement of raw matierals to the manufacture, distribution and retail, company has established the ¡§manufacturing distribution retail¡¨ business model by minimising intermediate costs as much as possible and producing as a whole. For FY2019/2 results announced on 8/4, net sales increased by 6.3% to 608.131 billion yen compared to the previous period, operating income increased by 7.9% to 100.779 billion yen, and net income increased by 6.2% to 68.18 billion yen. A 32-term consecutive increase in both sales and profit. Due to a stable supply system structure, ¡§N Cool¡¨, which uses material that is cool to the touch, and ¡§N Warm¡¨, which uses material that absorbs moisture and generates heat, have grown. For FY2020/2 plan, net sales is expected to increase by 5.7% to 643 billion yen compared to the previous year, operating income to increase by 3.2% to 104 billion yen, and net income to increase by 4.9% to 71.5 billion yen. Net sales for May in their existing stores have increased by 5.6% compared to the same month the previous year. Good sales situation was indicated during the 10-day holiday. Storage goods have risen due to the demand of additional purchases after consumers starting a new chapter in life. Recommend to buy at ¥13100, target price ¥15000, cut loss if drop below ¥12250.

Fuyao Glass (3606.HK) - Overseas segment Partly Makes up for the Negative Impact of Domestic Downturn

Investment Summary

The Company Has High Growth + High Dividend in 2018 and Steady Growth in the First Quarter of 2019

Fuyao Glass recorded a revenue of RMB20.23 billion in 2018, increasing by 8.1% yoy. The net profit attributable to the parent company was RMB41.2 billion, up by 30.9% yoy, with net profit attributable excluding non-recurring items reached RMB3.47 billion, a year-on-year increase of 14.4%. The EPS was RMB1.64. The dividend per share was RMB0.75. Plus the medium-term dividend of RMB0.4, the dividend payout ratio was 70%.

In the first quarter 2019 results report, the revenue of Fuyao Glass reached RMB4.93 billion in 19Q1, a slight increase of 3.9% yoy, and the net profit attributable to the parent company was RMB610 million, up by 7.7% yoy. The net profit attributable to the parent company excluding non-recurring items was RMB520 million, down by 13.2% yoy.

Fuyao Glass's brilliant profit performance in 2018 is mainly due to the boost from exchange gains and one-time gains from asset disposal. Benefiting from the devaluation of the RMB, the Company recorded exchange gains of RMB260 million in the whole year, compared with exchange losses of RMB390 million in the same period last year. The company sold 75% of Beijing Futong's equity, and recorded an investment income of RMB664 million. If such impact is excluded, the company's revenue was barely equal, outperforming the clearly declining industry average.

Q1 of 2019 saw an exchange loss of RMB130 million due to the appreciation of Renminbi, which was RMB90 million less than the same period of last year. We expected that with the depreciation of Renminbi, exchange loss would be significantly narrowed or even converted into exchange gain.

Overseas segment Partly Makes up for the Negative Impact of Domestic Downturn

After years of cultivation, the overseas business started to develop. The Company recorded a domestic business revenue of RMB11.57 billion in 2018, basically unchanged yoy, which was mainly affected by the slowdown of the domestic automobile market in Q4. Overseas revenue reached RMB8,312 million, a significant increase of 28% yoy, which was mainly due to the climbing capacity of US factories. In Q1 of 2019, the overseas revenue continued to grow rapidly and recorded a growth rate of 17% yoy, while the domestic business revenue fell by 10% yoy due to the continuous deterioration of the automobile market.

Gross Margin Is Under Pressure, Expense Ratio Remains Stable, and ASP Sees Steady Enhancement

In 2018, the gross margin of Fuyao Glass was basically unchanged, down 0.14 ppts yoy to 41.5%, among which the gross margin of domestic business increased by 1.07 ppts and that of overseas business decreased by 1.5 ppts, which was mainly due to the sales structure. In 2019, the Company's gross margin decreased by 3.4 ppts yoy to 39.1%, which was mainly due to 1) accelerated deterioration of the domestic automobile market, 2) the gross margin of North American business is still in the climbing period and its expanding proportion brought down the overall gross margin level, and 3) the impact of asset consolidation of the German company SAM.

The Company's expense ratio remained stable, dropping by 1.6 ppts during 2018 and by 1.2 ppts in Q1 of 2019. Owing to the expanding proportion of high value-added products, ASP was steadily enhanced, with an increase of 3.7% in 2018 and 4% in Q1 of 2019.

With Acquisition of the German Company SAM, Deepening of Overseas Business Expansion Continues

Fuyao Glass announced on January 15 to acquire the German Company SAM for EUR58.85 million. The Company started to set about consolidation from March 1 and set foot in the automotive aluminum trim strip industry. After the integration, it is expected to achieve integrated supply of aluminum trim strips and automotive glass, improve the added value of products and expand the customer base. Looking ahead, as the North American business steps on the right track, the Russian business has bottomed out and recovered, and the domestic market share continues to increase, we are optimistic that the Company's overall performance will maintain a stable growth in the future.

Investment Thesis

Overall, considering the steady leading position, continuous optimization of the product structure and a high dividend rate provide a greater margin of safety for the Company. We maintain the "Buy" rating¡Awith target price to be HK$ 27.3, equivalent to 15.1/14.3x P/E for 2019/2020E. (Closing price as at 13 June 2019)


Demand for automobiles keeps sluggish; cost of raw materials increases; RMB appreciates


Success market development of overseas automobile market; rebound of domestic demand for automobile; depreciation of RMB


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Recommendation on 19-6-2019
Price on Recommendation Date$ 21.630
Suggested purchase priceN/A
Target Price$ 27.300
Writer Info
Zhang Jing
(Research Analyst)
Tel: (+86 21 51699400-103)

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