EVA Precision Industrial Not Rated Primed For Further Growth

Company Update, 30 October 2014
EVA Precision Industrial (838 HK)
Not Rated
Industrial - Misc. Manufacturer
Market Cap: USD438m
Target Price:
Price:
NA
HKD2.02
Macro
Risks
Primed For Further Growth
Growth
Value
EVA Precision Industrial (838 HK)
Price Close
Relative to Hang Seng Index (RHS)
2.00
179
1.80
162
1.60
145
1.40
127
1.20
110
1.00
93
0.80
45
40
35
30
25
20
15
10
5
76

Sep-14
Jul-14
May-14
Feb-14
Dec-13
Source: Bloomberg
Avg Turnover (HKD/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (HKD)
Free float (%)
Share outstanding (m)
Shareholders (%)
12.5m/1.62m
-7.4
0.93 - 2.08
50
1,681
Mr. Zhang Hwo Jie
Capital Group
41.9
8.0
Share Performance (%)
YTD
1m
3m
6m
12m
Absolute
85.3
9.2
8.6
54.2
75.7
Relative
86.0
11.5
13.9
49.6
74.2

Leveraging its expertise to expand into new businesses. EVA
Precision (EVA) provides one-stop solutions from plastic and metal
moulds designs to mass production of components for office automation
(OA) equipment, eg professional printers requiring a high degree of
precision. Its customers include Kyocera Mita, Fuji Xerox, Konica Minolta
(4902 JP, NR), Toshiba (6502 JP, NR) and Samsung (005930 KS, NR).
Leveraging on its expertise in precision moulding and manufacturing, it
has also begun to supply smartphone and tablet casings to Korean and
Chinese brands and auto parts to Chinese automobile brands.
Strong growth set to continue in 2H14 and FY15. As its Wuhan auto
parts factory only began operating in 4Q13, it was running at just 40-50%
capacity in 1H14. Management expects its auto parts business to
steadily increase and anticipates the need for new production capacity
by FY16. It is also planning to add 100 computer numerical control
(CNC) machines for consumer electronics in FY15, as it receives more
orders for higher-end smartphones/tablets. We believe these are signs of
strong growth for 2H14 and FY15. In addition, EVA is likely to improve its
operating leverage as its auto parts unit is already at a breakeven level
and any further increase in revenue should be earnings-accretive.
Considering it has already achieved HKD124m in recurring NP in 1H14
and its new businesses may enjoy a stronger season in 2H, we believe
2H14 earnings could exceed EVA’s historical 1H/2H net profit split of
50/50% and that the consensus’ recurring NP forecasts of
HKD232m/302m for FY14/15 are too low
Valuations still look attractive. Management is confident to achieve
HKD270m/350m in FY14/15 recurring earnings based on a 45/55%
1H/2H14 earnings split and 30% YoY FY15 earnings growth. On these
numbers, EVA would be trading at 13x/10x FY14/15F P/Es, below its
global peer averages of 19x/11x. Its valuations still appear attractive as
its consensus forecast EPS CAGR of 53%, which we believe is on the
low side, is far higher than the 19% global peer average for FY14F-16F.
Forecasts and Valuations
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
1,026
1,703
1,978
2,367
2,656
Reported net profit (HKDm)
32
303
210
71
55
Recurring net profit (HKDm)
34
303
200
74
84
(63.1)
794.1
(33.9)
(63.0)
13.2
Recurring EPS (HKD)
0.03
0.21
0.12
0.04
0.05
DPS (HKD)
0.01
0.06
0.03
0.01
0.01
Recurring P/E (x)
78.0
9.5
16.5
47.2
40.5
P/B (x)
2.78
2.09
1.75
1.68
1.61
P/CF (x)
10.9
9.8
15.1
19.4
23.9
0.4
2.9
1.7
0.6
0.5
21.6
6.0
9.3
14.8
13.2
11.6
3.5
2.7
7.7
17.1
Total turnover (HKDm)
Shariah compliant
Christopher Tse +852 2103 9415
christopher.tse@rhbgroup.com
Recurring net profit growth (%)
Dividend Yield (%)
EV/EBITDA (x)
Return on average equity (%)
Net debt to equity (%)
3.4
18.7
24.4
net cash
net cash
Our vs consensus EPS (adjusted) (%)
See important disclosures at the end of this report


2

.
2
0
.
3
0
0
.
2
0
0
EVA is a leading precision moulds and components maker for OA .
0
equipment and recently, automobile and consumer electronics. Its 1H14 0
recurring earnings rose 177% YoY. In a recent briefing, management is 0
confident to achieve HKD270m/350m (+220/+30% YoY) in FY14/15
recurring earnings. This implies 13x/10x FY14F/15F core P/Es, ie below
the 19x/11x global peer average despite much faster growth rates.

Oct-13
Vol m
2.20




Source: Company data, RHB
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1
EVA Precision Industrial (838 HK)
30 October 2014

Supercharged 1H14 results. EVA announced a 177% YoY jump in recurring
net profit in 1H14. This was due to: i) a 35% YoY revenue growth, driven mainly
by a recovery of OA sales; ii) a ramp-up of auto parts and consumer electronics
sales, both accounting for 14-15% of total revenue (from ~15/8% in 1H13), iii) a
2.4-ppt GPM improvement on recovery in high-end OA orders, and iv) a 5ppt
YoY drop in its opex-to-sales ratio on better economies of scale while there were
no share option expenses in 1H14.
Figure 1: Interim profit & loss
FY end Dec 31 (HKDm)
Metal moulds
YoY
Metal components
YoY
 1H14 product mix of OA/auto/consumer
electronics was about 69/14/15% respectively
Plastic moulds
YoY
Plastic components
YoY
Lathing components
YoY
Microcredit
Other
Total revenue
YoY
 1H14 GPM of OA/auto/consumer electronics
Cost of sales
Gross profit
was about 28/20/20% respectively
GPM
Selling & marketing
General & administrative expenses
SGA as % of revenue
1H12
2H12
1H13
2H13
1H14
51
117
119
165
130
-17.4%
47.5%
135.2%
41.3%
8.5%
572
620
489
590
621
30.0%
8.9%
-14.5%
-4.8%
27.1%
32
49
68
43
76
-28.4%
68.9%
110.1%
-12.0%
12.0%
397
336
414
565
661
52.4%
5.6%
4.3%
68.4%
59.7%
95
60
65
73
75
69.8%
-27.1%
-31.7%
21.3%
16.0%
16
0
0
9
15
21
17
20
20
21
1,168
1,199
1,184
1,472
1,601
32.9%
9.1%
1.4%
22.7%
35.2%
-928
-928
-897
-1,119
-1,175
240
271
287
353
426
20.5%
22.6%
24.2%
24.0%
26.6%
-48
-65
-56
-83
-77
-137
-165
-198
-235
-200
-17.3%
-15.9%
-19.1%
-21.4%
-21.6%
Other income
0
0
0
0
3
Other gains
2
6
8
18
-3
56
48
41
53
150
0
4
4
6
11
-9
-15
-12
-17
-17
EBIT
Finance income
Finance cost
Share of loss of investment
PBT
Income tax
tax rate
MI
Net profit
YoY
Net profit - recurring
YoY
NPM
0
-1
-1
-2
-2
48
36
32
41
142
-8
-6
-4
-9
-13
-16.9%
-17.6%
-11.3%
-22.7%
-9.1%
0
1
-1
-3
-4
40
31
27
28
124
-61.4%
-71.1%
-32.8%
-7.4%
360.9%
40
34
45
39
124
-61.4%
-64.7%
11.9%
14.6%
176.5%
3.4%
2.8%
3.8%
2.6%
7.8%
Source: Company data, RHB

See important disclosures at the end of this report
Balance sheets remains healthy as at end-1H14. EVA’s net gearing was 15%
(end-1H13 / FY13: 15%/17%). Receivable turnover was slightly up to 82 days
(end-1H13 / FY13: 79 / 81), inventory turnover stood at 54 days (end-1H13 /
FY13: 55 / 53) and payable turnover rose slightly to 121 days (end-1H13 / FY13:
108 / 117).
2
EVA Precision Industrial (838 HK)
30 October 2014
New Growth Drivers
Auto parts. EVA received supplier certifications from Dongfeng and FAWVolkswagen in 2013. From its new Wuhan factory, management expects to derive
HKD200m in turnover in FY14 at a 50% utilisation rate, in addition to its auto moulds
business from its Chongqing factory, EVA will supply front hoods, doors or whole
metallic body frames of motor vehicles. Management has strategically chosen Wuhan,
as the city is the location of the headquarters of Dongfeng Motor Group (389 HK, NR)
General Motors (GM US, NR), Peugeot Citroen (UR FP, NR) and Honda (7267 JP,
NR).
Figure 2: Milestones
Auto parts business milestones
2011
Acquisition of Chongqing Digbie Auto Body Ltd., marks entry into auto parts business
2013
Granted with "Mould Supplier Certification" by FAW-Volkswagen
"Excellent Supplier Award" by Dongfeng
Wuhan component production base completed in 4Q13
2014
Wuhan component production base expected to reach 50% utilization rate
Source: Company data
Consumer electronics casings. We learned that EVA has obtained small orders for
tablet and smartphone casings from top Korean and Chinese brands. As the
production capacity for OA can be retooled to produce consumer electronics, the
segment can potentially grow rapidly should large volume orders come in. In view of
the potential growth in this segment, management intends to enhance its capabilities
by adding 100 CNC machines.
See important disclosures at the end of this report
3
EVA Precision Industrial (838 HK)
30 October 2014
Figure 3: Profit & loss
FY end Dec 31 (HKDm)
FY09
FY10
FY11
FY12
FY13
Metal stamping
Moulds
Components
73
196
140
167
284
508
787
1,009
1,192
1,079
Plastic injection
Moulds
51
128
74
81
111
304
456
578
733
979
0
0
0
0
24
Lathing components
68
98
139
156
138
Other
23
37
37
39
40
Components
Microcredit
Total revenue
Cost of sales
Gross profit
GPM
Selling & marketing
1,026
1,703
1,978
2,367
2,656
-822
-1,162
-1,489
-1,856
-2,016
204
542
489
511
640
19.9%
31.8%
24.7%
21.6%
24.1%
-139
-50
-65
-80
-113
-105
-123
-179
-302
-432
-15.1%
-11.0%
-13.1%
-17.5%
-21.5%
Other income
0
0
0
0
0
Other gains
0
3
15
8
25
General & administrative expenses
SGA as % of revenue
EBIT
EBIT margin
Finance income
Finance cost
Share of loss of investment
PBT
Income tax
tax rate
MI
Net profit
Non recurring item (net of tax)
Net profit - recurring
YoY growth
Net margin
49
357
244
104
94
4.8%
20.9%
12.4%
4.4%
3.5%
2
1
4
5
10
-12
-6
-9
-24
-29
0
0
0
-1
-3
39
352
239
84
72
-7
-48
-30
-14
-13
-18.4%
-13.7%
-12.3%
-17.2%
-17.7%
0
-1
1
1
-4
32
303
210
71
55
28
2
0
-10
3
34
303
200
74
84
-63.1%
794.1%
-33.9%
-63.0%
13.2%
3.3%
17.8%
10.1%
3.1%
3.2%
Source: Company data
See important disclosures at the end of this report
4
EVA Precision Industrial (838 HK)
30 October 2014
Figure 4: Peer comparison I
Ticker
838 HK
3-mth
Mkt cap avg t/o
Price (USDm) (USDm)
2.04
442
1.7
FY13
P/E
40.9
FY14
P/E
17.3
Tongda Group Hld
698 HK
1.03
726
14.8
14.2
10.4
8.1
37.0
28.7
27.2
0.29
7.0
Tk Group Holding
2283 HK
1.84
196
0.9
8.4
10.1
7.8
(16.8)
28.4
8.0
1.26
0.0
Ju Teng Intl Hdg
3336 HK
4.44
668
2.9
6.7
6.5
5.4
3.6
19.2
12.5
0.52
9.8
9.0
7.1
7.9
25.5
15.9
Company
Eva Precision
FY15 EPS FY14 EPS FY15 3-Yr EPS PEG FY13 Div FY14 Div
P/E y-o-y (%) y-o-y (%) CAGR (%) (x) yld (%)
yld (%)
12.6
136.8
37.0
53.0
0.27
0.6
1.5
FY13
P/B
1.6
FY14
P/B
1.2
9.6
1.8
1.5
2.9
N/A
3.4
3.4
3.7
0.8
0.7
0.7
3.5
5.4
1.3
1.9
HK-listed
HK-listed average
Non-HK listed
Amtek Engineer
AMTK SP
0.61
259
0.2
14.8
6.8
5.9
118.8
14.3
N/A
N/A
3.8
6.3
1.5
1.3
Hi-P Intl Ltd
HIP SP
0.66
421
0.2
84.0
65.5
13.1
28.2
400.0
N/A
N/A
0.9
3.1
1.0
N/A
Syncmold Enterpr
1582 TT
55.20
272
2.4
12.5
10.4
9.1
19.3
14.4
N/A
N/A
6.3
6.9
1.7
1.7
Coxon Precise In
3607 TT
52.50
206
1.4
14.7
11.6
9.7
26.7
19.4
N/A
N/A
6.1
7.4
1.1
0.9
Masterwork Mac-A
300195 CH 32.78
914
7.4
32.5
30.2
21.9
7.4
37.8
21.7
1.39
2.1
1.7
2.6
2.7
Greatoo Inc-A
002031 CH 12.20
942
16.9
33.0
22.6
17.9
45.9
25.9
N/A
N/A
0.4
N/A
3.1
N/A
6339 JP
716.0
375
0.8
13.8
16.9
16.5
(18.5)
2.1
(5.3)
(3.2)
1.8
2.0
0.5
N/A
NNBR US
22.32
397
3.5
22.3
14.5
8.0
54.0
81.8
47.4
0.3
0.8
N/A
2.5
N/A
Non-HK listed average
28.4
22.3
12.8
35.2
74.5
21.3
(0.5)
2.8
4.5
1.7
1.7
Global average
23.3
18.7
11.2
27.8
61.1
18.6
0.1
3.0
4.8
1.7
1.8
Sintokogio Ltd
Nn Inc
Note: Uses recurring EPS forecasts
Source: Bloomberg, RHB estimates for Tongda and HI-P
Figure 5: Peer comparison II
Symbol
838 HK
Company
EVA PRECISION
Rev FY13
(USDm)
342
Rev FY14F
(USDm)
439
Rev FY15F
(USDm)
533
Gross
margin
FY13 (%)
24.1
Gross
margin
FY14F (%)
N/A
Gross
margin
FY15F (%)
N/A
Net margin Net margin Net margin
FY13 (%)
FY14F (%)
FY15F (%)
2.1
6.8
7.3
HK listed
698 HK
TONGDA GROUP HLD
467
667
839
22.0
23.2
23.5
9.6
10.2
10.7
2283 HK
TK GROUP HOLDING
154
189
230
33.9
27.6
28.4
10.1
10.3
11.0
3336 HK
JU TENG INTL HDG
1,194
1,238
1,329
20.2
19.3
20.5
8.2
8.5
9.3
25.4
23.4
24.2
9.3
9.6
10.4
HK listed average
Non-HK listed
AMTK SP
AMTEK ENGINEER
633
685
721
14.8
N/A
N/A
2.8
5.2
5.8
HIP SP
HI-P INTL LTD
992
940
1,242
7.7
N/A
N/A
0.5
1.0
2.7
1582 TT
SYNCMOLD ENTERPR
299
327
350
22.0
22.1
22.6
7.2
8.0
8.5
3607 TT
COXON PRECISE IN
265
289
319
15.2
15.5
15.9
5.2
6.1
6.6
300195 CH MASTERWORK MAC-A
100
155
218
43.3
44.3
44.6
23.4
19.6
19.1
002031 CH GREATOO INC-A
147
N/A
N/A
36.5
N/A
N/A
18.7
N/A
N/A
6339 JP
SINTOKOGIO LTD
824
842
870
28.5
28.4
28.4
3.2
2.5
2.5
NNBR US
NN INC
373
481
722
20.9
N/A
N/A
4.6
N/A
N/A
Non-HK average
23.6
27.6
27.9
8.2
7.1
7.5
Global average
24.1
25.8
26.3
8.5
7.9
8.5
Note: Uses recurring net profit forecasts
Source: Bloomberg, RHB estimates for Tongda and HI-P
See important disclosures at the end of this report
5
EVA Precision Industrial (838 HK)
30 October 2014
Financial Exhibits
Profit & Loss (HKDm)
Total turnover
Cost of sales
Gross profit
Dec-09
Dec-10
Dec-11
Dec-12
1,026
1,703
1,978
2,367
2,656
(1,162)
(1,489)
(1,856)
(2,016)
(822)
Dec-13
204
542
489
511
640
(105)
(123)
(179)
(302)
(432)
(50)
(65)
(80)
(113)
(139)
0
3
15
8
Operating profit
49
357
244
104
94
Operating EBITDA
130
445
346
254
292
Depreciation of fixed assets
(195)
Gen & admin expenses
Selling expenses
Other operating costs
(81)
(87)
(100)
(147)
Amortisation of intangible assets
(1)
(1)
(2)
(3)
Operating EBIT
49
Net income from investments
-
Interest income
2
Interest expense
(12)
357
244
-
1
(6)
104
25
(3)
94
(1)
(3)
4
5
10
(9)
(24)
(29)
Pre-tax profit
39
352
239
84
72
Taxation
(7)
(48)
(30)
(14)
(13)
1
1
(4)
Profit after tax & minorities
32
303
210
71
55
Reported net profit
32
303
210
71
55
Recurring net profit
34
303
200
74
84
Dec-13
Minority interests
-
(1)
Source: Company data, RHB
Cash flow (HKDm)
Dec-09
Dec-10
Dec-11
Dec-12
Operating profit
49
357
244
104
94
Depreciation & amortisation
82
88
102
150
198
125
(126)
(77)
(29)
(148)
(10)
2
29
227
173
Change in working capital
Other operating cash flow
Operating cash flow
4
0
259
320
Interest received
Interest paid
259
2
1
4
5
10
(12)
(6)
(9)
(24)
(29)
Tax paid
(21)
(36)
(28)
(13)
Cash flow from operations
243
(6)
294
219
180
142
Capex
(75)
(262)
(472)
(342)
(277)
Other new investments
-
Other investing cash flow
0
(19)
-
22
(8)
(73)
(106)
48
Cash flow from investing activities
(74)
(270)
(564)
(449)
(207)
Dividends paid
(20)
(57)
(76)
(40)
(17)
Shares repurchased
(92)
-
-
(53)
-
7
438
314
0
0
(39)
(87)
153
698
170
Proceeds from issue of shares
Increase in debt
Other financing cash flow
(52)
(42)
(33)
37
(27)
(196)
252
359
642
125
Cash at beginning of period
252
224
501
515
889
Total cash generated
(27)
277
14
374
61
Forex effects
-
-
0
1
4
Implied cash at end of period
224
501
515
889
953
Cash flow from financing activities
Source: Company data, RHB
See important disclosures at the end of this report
6
EVA Precision Industrial (838 HK)
30 October 2014
Financial Exhibits
Balance Sheet (HKDm)
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
226
505
517
994
1,017
96
151
302
270
310
Accounts receivable
206
325
393
423
553
Other current assets
19
50
86
102
257
Total current assets
547
1,032
1,299
1,789
2,136
Total cash and equivalents
Inventories
Total investments
Tangible fixed assets
Intangible assets
-
-
-
1,001
1,137
1,526
-
-
10
18
1,878
2,051
3
3
3
8
56
170
144
142
Total non-current assets
1,009
1,193
1,699
2,035
2,213
Total assets
1,555
2,224
2,998
3,824
4,349
Short-term debt
302
235
322
558
706
Accounts payable
171
226
388
392
514
89
138
157
180
255
562
599
868
1,130
1,475
92
30
62
596
682
5
5
23
22
22
97
35
85
618
704
658
634
953
1,748
2,179
62
82
176
168
168
Retained earnings reserve
835
1,499
1,855
1,846
1,934
Shareholders' equity
897
1,581
2,031
2,014
2,102
Minority interests
-
9
13
62
Other equity
-
(0)
(0)
(0)
Total other assets
Other current liabilities
Total current liabilities
Total long-term debt
Other liabilities
Total non-current liabilities
Total liabilities
Share capital
Total equity
68
-
897
1,590
2,044
2,076
2,170
1,555
2,224
2,998
3,824
4,349
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
(5.4)
66.0
16.1
19.7
12.2
Operating profit growth (%)
(55.4)
631.1
(31.5)
(57.5)
(9.8)
Net profit growth (%)
(61.8)
860.3
(30.5)
(66.3)
(21.8)
EPS growth (%)
(58.2)
785.2
(39.8)
(68.1)
(19.3)
Bv per share growth (%)
4.8
33.5
19.2
3.8
4.4
Operating margin (%)
4.8
20.9
12.4
4.4
3.5
Net profit margin (%)
3.1
17.8
10.6
3.0
2.1
Return on average assets (%)
2.0
16.0
8.1
2.1
1.4
Return on average equity (%)
3.4
24.4
11.6
3.5
2.7
Net debt to equity (%)
18.7
(15.1)
(6.5)
7.7
17.1
DPS
0.01
0.06
0.03
0.01
0.01
Recurrent cash flow per share
0.19
0.21
0.13
0.10
0.08
Total liabilities & equity
Source: Company data, RHB
Key Ratios (HKD)
Revenue growth (%)
Source: Company data, RHB
See important disclosures at the end of this report
7
EVA Precision Industrial (838 HK)
30 October 2014
SWOT Analysis
 Provides one-stop solutions for clients, including both
plastic and metal molding and subsequent
manufacturing
 Market is quite
fragmented
 Able to retain clients through strong manufacturing
capabilities and low defect rates
 Potential
penetration into
more products
in the consumer
electronics
segment
 Fairly stretched valuation compared against Hong
Kong-listed peers
P/E (x) vs EPS growth
P/BV (x) vs ROAE
90
900%
80
778%
70
656%
4
30%
3
26%
3
21%
1
9%
20
44%
10
-78%
1
4%
0
-200%
0
0%
EPS growth (rhs)
Source: Company data, RHB
Jan-10
Jan-10
P/E (x) (lhs)
P/B (x) (lhs)
Jan-13
13%
167%
Jan-12
2
30
Jan-11
17%
Jan-09
2
289%
Jan-13
411%
40
Jan-12
50
Jan-11
533%
Jan-09
60
Return on average equity (rhs)
Source: Company data, RHB
Company Profile
EVA Precision Industrial manufactures precision moulds and components for office automation (OA) machines and equipment. Its
serves mainly Japanese customers such as Kyocera and Konica Minolta
See important disclosures at the end of this report
8
EVA Precision Industrial (838 HK)
30 October 2014
Recommendation Chart
Price Close
1.74
Recommendations & Target Price
na
4.11
3.61
3.11
2.61
2.11
1.61
1.11
0.61
Buy
0.11
Oct-09
Neutral
Feb-11
Sell
Trading Buy
May-12
Take Prof it
Not Rated
Aug-13
Source: RHB, Bloomberg
Date
Recommendation
2014-06-17
Not Rated
Target Price Price
1.74
1.66
Source : RHB, Bloomberg
See important disclosures at the end of this report
9
RHB Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage
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