Penang Jakoda's strong first-quarter results, strong turnover growth and improved profit margins reconfirmed our positive view of the company and reflected that weak smartphone shipments had no significant impact on its operations.

The company's orders gradually fell from an all-time high of 303 million ringgit at the end of December 2018 to 2.524 ringgit at the end of March 2019. We expect its orders to pick up moderately in the second half of 2019 compared with the first half. We believe that the order on hand will support the company's growth in 2019.

Penang Jakota's short-term growth will be supported by the adoption of new technologies and the diversification of the industry by smartphone OEM. We also believe that global supply chain reshaping will bring growth to the company.

After we raised our gross margin forecasts for 2019 and 2020, our profit forecast for 2019 was raised accordingly, with the target price rising from HK $1.48 to HK $1.52. The stock trades at 6.7 times 2019 earnings, an attractive valuation given the company's growth potential and healthy balance sheet.

Strong results in the first quarter

The company reported strong first-quarter results last night. Turnover in the first quarter was 1.1671 ringgit, up 19.0% from 9810 ringgit in the first quarter of 2018. The company's first-quarter net profit was 3030 million ringgit, up 42.7 percent from 2290 ringgit in the first quarter of 2018. The strong first-quarter results were due to: a) better-than-expected gross profit margin; and b) cost control. Gross profit margin for the first quarter of 2019 was 35.3%, the highest level since the first quarter of 2018 (31.4% compared to our expectations). In the first quarter, administrative and administrative expenses accounted for 11.8% of total turnover, down from 13.0% in the first quarter of 2018. The improvement in gross profit margin is due to product portfolio optimization and economies of scale. Profit margins in telecoms and automobiles have risen, and customers' repeated orders have brought higher profitability to the company. As of the end of March 2019, the company had 2.693 billion ringgit of cash and cash equivalents, up from 2.177 billion ringgit at the end of December 2018. The company's orders fell to 2.524 billion ringgit from an all-time high of 303 million ringgit at the end of December 2018. We believe that the decline in orders is normal, and we expect orders to pick up again in the second half of 2019 (compared with the first half of the year). The company's first-quarter results confirm our positive view of the company and reflect that soft smartphone shipments have little impact on the company. We reiterate that the company's smartphone market-related business is related to the adoption of new technologies, which is why the company outperforms other mobile component manufacturers.

Growth power

The company's growth in the coming years will mainly benefit from: a) the company's deeper provision of test equipment and solutions to customers to meet the needs of a variety of products and wider adoption of smart sensors in multiple market segments; b) the company's increased market share in 3D sensor module test equipment and solutions; and c) the company's continued and active development of other business segments. In view of the escalating trade tensions between China and the United States, we believe that global supply chain reshaping will become one of the hot topics. We believe the company will benefit from this trend because of its expertise, extensive customer network and geographical coverage. Information and guidelines from Taiwan equipment companies also show that the economy improved in the second half of 2019 compared with the first half of the year. We raised our target price from HK $1.48 to HK $1.52, mainly due to an increase in profit forecasts for 2019 after raising gross margin forecasts for 2019 and 2020 from 31.4% and 31% to 32.4% and 32%, respectively.