Citi downgraded VTech's (00303.HK) rating from neutral to sell-sale, and the target price was lowered from $83 to $78, mainly due to poor performance but strong stock price performance. The current valuation already reflects management's recovery target for Leapfrog in FY2018; the 2017 restructuring fee may also be higher than expected. The bank expects the company's earnings to fall 17% in fiscal year 2017, which may pose a downside risk to stock prices.

The bank expects the company's profit for the first half of the fiscal year to fall 29% year-on-year to 71 million US dollars, but this forecast does not include the impact of two-thirds of layoffs. In other words, even if the distribution ratio increases to 100%, the actual payout will decrease due to a decline in profit, which does not match the current high valuation.

The bank also estimates that the company's one-time expenses for layoffs and employee retention may reach 20 million to 40 million US dollars. Considering that the company lowered the allocation rate from 100% to 58% due to the acquisition of Leapfrog in the early years, it is believed that it is impossible to rule out that the company will sacrifice allocations due to one-time expenses.