The Windows 8 Connection
The new Windows 8 OS will help PC Brands to break into the Tablet market by its touch-screen focus and mobile applications and drive new growth demand for Ju Teng in the tablet casing market.
Is It Cheap?
- Trading at 0.75x P/NTA, a 25% discount to its 5 year average P/NTA of 0.99
- ROE (trailing twelve months) was 8.3% and ROE (five-year average) was 14.4%
- Dividend yield 2.5%
- Book Value Growth (five years) 22.2%
Is It Safe?
- Total Gross Debt to Equity Ratio was 60.1%, net gearing 50.1%.
- Wafer thin margins susceptible to cost margins
Ju Teng's Net Profit Margin (TTM) of 4.39% and Net Profit Margin - 5 Yr. Avg of 6.97% are at risk if RMB appreciates and labour costs increase.
- Slowdown in global notebook demand
Given that nearly 100% of Ju Teng's current sales are generated from notebook casings, any slowdown in global notebook demand will hit Ju Teng severely.
- Success/Failure of Windows 8
Sales of Windows 8 Tablet devices will have a direct impact on whether Ju Teng will be able to make up for lost notebook sales in the Windows 8 Tablet casing market
Is It Quality?
- No. 1 position in the notebook casing globally
Ju Teng counts the top tier PC Brands among its customers gand has a certain level of bargaining power over customers as the casing for different customers are highly specific and vary from model to model.
- High entry barriers
Material know-how & surface treatment technology, strong relationships with Taiwanese notebook OEM and large capital investment in CNC will put Ju Teng in a strong position against potential entrants.
- Ultrabook's thinner designs play to Ju Teng's strengths
Ju Teng's strengths in Material know-how & surface treatment technology puts it in a better position to capitalize on the higher design requirements for ultrabooks.
- Material Diversification Strategy
Ju Teng invests in in multiple materials rather than putting all the resources in one single material. Casing
could become a differentiating form factor for Ultrabook makers and Ju Teng could benefit from Notebook OEMs mixing and matching different combinations of casing materials to separate themselves from peers.
Valuations are fair and uncompelling now, given the strong share price outperformance since June 2012.
Future share price upside is highly dependent on the success of Windows 8 Tablets and ultrabooks. There is an added unknown with Microsoft directly competing with PC brands with the Windows Tablet.
Disclosure: Not Vested