Europtronic: Recovery taking shape

We recently visited Europtronic Group Ltd's (EGL) operation in China. At
its Suzhou plant, orders have picked up as guided, with utilization now
running at 85%, producing Europtronic-branded and OEM capacitors. EGL
also gave an update on its plan to venture into the lighting industry, where
we understand talks are in advanced stages, and deals could come in late
2H. Its distribution business has also become more focused, with EGL
concentrating on products with better margins. EGL has also been cross
selling its manufacturing and distribution services and has plans to expand
its geographical reach. We have raised our FY07 estimates by 3.4% (FY08
+6.2%) for revenue and 15.5% (FY08 +44.2%) for earnings, driven by the
continued recovery in 2H and new initiatives for 2008. Fair value estimate
also improves from S$0.13 to S$0.16, now based on 1x blended FY07/08
NTA (vs. 0.8x FY07 previously). But due to recent rise in price, the stock
appears to be fairly priced, and hence we retain our HOLD recommendation.


Visit to EGL's China facilities. We visited Europtronic Group Ltd (EGL)
last week at its manufacturing and distribution facilities in China. The factory
in Suzhou manufactures film capacitors and has the capacity to put out
about 876m units annually. EGL has a smaller plant in Shenzhen which
produces about 204m capacitors annually, and one in Hsinchu Taiwan making
about 600m inductors per year. The Shanghai sales office also serves as
the distribution hub for eight other rep offices there.
Manufacturing business buzzing. At its Suzhou plant, we could see that
its manufacturing orders have picked up as guided, with utilization now
running at 85% on two 12-hour shifts six days a week, producing Europtronicbranded
and OEM capacitors. EGL also gave an update on its plan to
venture into the lighting industry, where we understand talks are in advanced
stages, and deals could come in late 2H. In addition, we understand that
new CFO Chan Wah Tiong, an electronics manufacturing industry veteran,
has been reviewing and overhauling its operations over the last two months
to improve efficiency and productivity. Some of these measures involve
streamlining operating processes and installing a new VMI (Vendor Managed
Inventory) warehouse system to lower inventory costs. The review is still
ongoing but we should see some benefits from 2H07 onwards.
Distribution business more focused. Its distribution business has also
become more focused, with EGL concentrating on products with better
margins from principals like AVX, Sharp, Tyco, JST for customers in the
connecting (telecoms), computing, consumer electronics, industrial and
automobile segments. EGL has also been cross selling its manufacturing
and distribution services and has plans to expand its geographical reach. A
sales office will be set up in India in August this year to support existing
customers there. EGL will initially transfer about US$150k of monthly sales
over and slowly grow its business from there. We understand EGL also
plans to do the same in Korea.
2H recovery shaping up. We have raised our FY07 estimates by 3.4%
(FY08 +6.2%) for revenue and 15.5% (FY08 +44.2%) for earnings, driven
by the continued recovery in 2H and new initiatives for 2008. Fair value
estimate also improves from S$0.13 to S$0.16, now based on 1x blended
FY07/08 NTA (vs. 0.8x FY07 previously). But due to recent rise in price, the
stock appears to be fairly priced, and hence we retain our HOLD
recommendation. (Carey Wong)
(OCBC Investment Research Pte Ltd (OIR) produced this report under the
SGX-MAS Research Incentive Scheme. OIR is compensated S$5,000 per
annum for each company covered under the scheme.)