From the report, with my own thoughts in bold…
Business Review & Prospect
In 2012, due to continued economic weakness in the U.S. and European countries, the global personal computer industry recorded a disappointing year marked by shipment decline. Notwithstanding these challenges in the market, Ju Teng achieved remarkable results with its profits more than doubled during the year, which underscored the Group’s success in corporate transformation by focusing on product diversification and improvement in gross profit margin.
During the year, Ju Teng continued to expand its production capacity, especially the metal casing segment with a higher gross profit margin. In addition, the Group also expanded its production facilities in Neijiang City, Sichuan Province, with the construction of second phase which has already commenced production after its construction completion in late 2012.
During the year, Ju Teng saw its metal casing orders growing with the expansion of production capacity in this segment. In the first half of 2012, the Group began to supply aluminum unibody casings to a Korean customer (i.e. Samsung) and received more metal casing orders from a number of major notebook computer brands in the second half of the year. Thanks to this impressive sales growth, the metal casing segment accounted for approximately 20% of the Group’s total revenue this year in comparison to approximately 10% in the previous year.
Furthermore, Ju Teng also put great efforts in the expansion of carbon fibre casing operations during the year. For its resilient and high heat resistant properties as well as colorful surface treatment possibilities, carbon fibre casing is suitable for notebook computers at the higher end of the market. Two years ago, the Group cooperated with a Japanese company that specializes in carbon fibre technology to conduct research and development on the application of this technology in notebook computer casing. During the year, the Group’s carbon fibre casing operations commenced mass production and started to contribute to its annual revenue.
In 2012, Ju Teng’s plastic casing operations also made considerable progress after last year’s intense price war that put some competitors out of business (yes, I know a lot of them either went out of business, or switched to another industry all together. The thing with most analysts/Wall Street is that they can’t forecast turnarounds, they just follow the trend line.). Leveraging on its competitive advantage as a leader in the casing industry, the Group received more new contracts for plastic casings during the year. The Group also tapped into the tablet PC market by providing plastic casings for a popular brand, which further increased its share in the plastic casing market. In respect of pricing, Ju Teng’s plastic casing orders managed to fetch higher price tags during the year after the Group abandoned its low-price and high-volume strategy, which helped the Group enhance its overall gross profit margin.
Looking ahead, apart from stimulating plastic and metal casing sales via construction of new production facilities, Ju Teng also plans to step up its research and development on carbon fibre technology. The Group aims to improve the yield rate of carbon fibre casings while lowering the production costs and selling price, thereby facilitating its market penetration. With the increasing adoption of carbon fibre casings by notebook computer brands, the Group expects its carbon fibre casing business to speed up in the coming year. The Group will also put great efforts to develop non-metal casing solutions that shall lower production costs, especially slim casings made with techniques of plastic injection molding and processing of composite materials. These hybrid casings offer the advantage of lower production cost in comparison to metal casings. Therefore, the market demand for hybrid casings is expected to pick up in the future. (is this enough to bring further increases in sales?)
In addition, thanks to the exponential growth of tablet PC in recent years and Microsoft’s launch of Windows 8 operating system tailor-made for touch screens, it is expected that more tablet PCs will be introduced in the market in 2013. Therefore, Ju Teng has taken substantial efforts to reinforce cooperation with major brands by providing more casing solutions, thereby boosting the growth of its tablet PC segment.
Apart from business expansion, Ju Teng also pays great attention to cost control in its operations. Since Chinese workers’ salary hike has slowed down recently, management believes that the coming year will see relative modest wage increase, which will help the Group transfer this cost pressure to its customers by requesting for upward price adjustment in contracts. In addition, management is also closely monitoring the development of Renminbi (“RMB”). While the value of RMB continues to trend upward, it nevertheless is moving in a markedly slower pace, which can minimize risks arising from exchange rate volatility and help Ju Teng achieve operating stability. In the coming year, the Group aims to enhance its gross profit margin further with effective cost control measures (right now margin before tax is at 7.9% which is similar to the level it achieved in 2005, peaking at 12.5% in 2009. Although the margin is back to where it was before, but its return on equity halved. This is because they need a lot more assets to generate the same amounts of profits. Profitability dropped substantially probably because the industry is getting matured and more competitive. ), thereby pushing its profits to a new high. (they make it sound really easy, if they do reach a new high in profits, which was $934 million before tax in 2009, this would make the company generate about 15% ROE before tax, and a price of around $6-$7.)
According to my valuation, this company is worth around $5 and it has already shown in its share price. At a fairly valued proposition, the only reason I would hold onto this is because of further increases in profits for 2013. However optimistic is the management about the future, I still need to stay rational and conduct my own analysis.