We first gave Tianbao Group (Tianbao) a buy rating, with a target price of HK $1.05 (up more than 100%) based on a price-to-earnings ratio of 7 times forecast earnings for fiscal 16. Tianbao supplies switching power charger solutions to first-line brands that produce consumer electronics and power tools. Main drivers: I) increased orders from power tools customers; and (ii) automated production to drive profitability. Tianbao will announce its results for fiscal year 15 on March 24. We predict that the core net profit for fiscal year 15 will increase by 21% year-on-year, while the current share price is only 3 times the forecast price-to-earnings ratio for fiscal year 16. The valuation is seriously low.
Switching power supply suppliers, customers are mainly first-tier brands
Founded in 1979, Tianbao is a supplier of switching power chargers and solutions to consumer electronics (including smartphones, set-top boxes, routers and e-cigarettes) and industrial power tools. In the first half of 15, the company's top five customers included Bosch Group, Flextronics (FLEX US, unrated), Opper Mobile and TCL Communications (2618 HK, unrated). Competitive advantages include setting up our own safety testing laboratory and having strong internal R & D strength.
The division of power tools drives revenue growth
Benefiting from the growing market share of two major customers, Bosch and Stanley, Black & Decker (SWK US, unrated), we expect the power tools division's earnings for fiscal year 16 to grow by 19% and 15% year-on-year. In terms of consumer electronics, we believe that despite the strong growth in Opper's market share, other customers (such as TCL) are mediocre, offsetting each other, we maintain a conservative forecast for revenue growth of the consumer electronics segment in fiscal year 16 and 17, with a forecast growth rate of 13% and 11%. The growing number of smartphones in the market using fast-charging technologies (such as Opper's flash charge) and the entry of e-cigarettes into China's untapped market have created great growth potential for Tianbao's consumer electronics division.
Automation and product mix drive profitability
In FY15, Tianbao moved its labour-intensive production process from Huizhou to a new plant in Hanzhong, Shaanxi Province, to reduce labor costs and install automated SMT (Surface Mount Technology) machines in the vacant locations of the Huizhou plant to improve production efficiency. In addition, with the increase in the proportion of products in the power tools division (the segment gross profit margin is about 22-24%; the company's average gross profit margin is about 17%). We forecast revenue growth of 13% for fiscal year 16, 17, and core net profit margin of 10%, and core net profit margin will gradually increase from 4-5% in fiscal year 14, 15 to 6.4% in 17 years, which will lead to an increase of 31% and 18% of core net profit in fiscal year 16.
The valuation is seriously low; the first purchase, the target price is HK $1.05
Our target price is based on an average price-to-earnings ratio of 7 times the forecast price-to-earnings ratio of Hong Kong-listed industrial stocks for fiscal 16. Considering that Tianbao's customers are mainly first-tier brands, coupled with a competitive advantage, the outlook can bring sustainable profit growth for the company. Based on our net profit forecast and the company's sound cash flow, Tianbao's current price is only 3 times the forecast price-to-earnings ratio for fiscal 16, and the valuation is unreasonably low. Main risks: health risks of e-cigarettes, reputation damage caused by product failure, and slower-than-expected growth.
