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TK GROUP(HOLDINGS)LIMITED(2283.HK):ATTRACTIVE AND DEFENSIVE INDUSTRIAL PLAY

信达国际 ·  May 8

Expects recovery in FY24E, strong balance sheet

We had an operational update meeting with TK's management in Hong Kong this Monday (May 6). TK's FY23 revenue and net profit was down 14.6%/10.0% Yoy respectively to HK$1,945mn/HK$204mn, due to weak downstream demand. However, blended GM managed to grow 2.7 ppts Yoy to 26.4% (the highest since FY20), thanks to mold fabrication GM soared 10 ppts Yoy to 37.0% (similar to FY17 and FY18 level) and set off the 1.4 ppts Yoy drop in plastic products GM. The huge increment in mold fabrication GM was mainly lead by i) lower raw material cost, ii) improved operating efficiency through automation and iii) RMB depreciation during the period. We expect mold fabrication GM would still be >30% driven by operating efficiency , while plastics components GM would be ~mid-20s in FY24E driven by downstream demand recovery and new clients' order ramp up. TK's current mold fabrication and plastics components segment utilization rose to >90%/>50% (vs. ~83%/<50% in FY23). With higher utilization rate, we expect this would benefit TK's result to recover, accompanied by gradual GM improvement.

TK's financial position remains strong, with net operating cash inflow up 20% Yoy to HK$445mn in FY23, and net cash position at ~HK$1.1bn (~72% of TK's market cap), which enabled TK to raise its dividend payout ratio to 80% level in FY23. With CAPEX remains low in FY24E, we expect payout ratio would be able to stay >50%.

FY24E main growth drivers: Consumer electronics recovery + electronic atomizers' order ramp up + new clients' contribution

TK's order book came in at HK$830mn (+2.0% Yoy) in FY23, which was mainly contributed by automotive, medical & healthcare, which accounted for 46% of total order book. Management shared that order book further increase to ~HK$1bn in Apr, which we believe has set up a good fundamental for TK's recovery in FY24E & FY25E. Revenue from electronic atomizers and automobiles each grew 63%/23% Yoy to ~HK$200mn/HK$370mn in FY23 and took up 10.5%/18.6% of total revenue.

Order ramp up from electronic atomizers, continue to support TK's revenue growth, while smartphones & wearables and automobiles would continue to play a part. TK is still optimistic towards its electronic atomizers, as it is not only being driven by e-cigarettes but also can be used in medical devices to atomize drugs into micron-sized aerosols.

TK continues to diversify its client portfolio, and having successfully tapped into a leading global AR company (we beliver to be Meta), a leading brand of bone conduction earphone and a renowned wearable camera company (we believe to be Insta360 with ~50% global market share in consumptive panoramic camera market in 2022) in China.

FY24E CAPEX stay low, ample cash for potential M&A and share buyback

TK's FY23 CAPEX came in at ~HK$70mn and expects FY24E would be similar, in which ~40-50% would invest in Mexico (invest in a plastic component manufacturing plan based on current clients' needs), while remaining would be maintenance CAPEX. With ample cash on hand, TK is still seeking for M&A opportunities that would bring synergy to the group. Given its leading position in the industry, we still believe TK would enjoy a stronger bargaining power when suitable target emerges. Management also considers to kick off share buybacks when suitable.

Undemanding valuation on healthy financial position and solid fundamentals, Maintain BUY

We estimate TK's revenue and net profit to grow 12.5%/18.5% CAGR in FY23-26E, it's FY24E 6.1x PE (~1 s.d. below its average PE since listed in end-2013, and ~50% discount to Hong Kong and international peers) looks undemanding to us. We arrive TK's new TP at HK$2.44 which translates to FY24E 7.8x PE (35% discount to peers) and near its average PE since listing.

With CAPEX expected to stay relatively low in FY24E (vs. FY16-FY22), we expect TK's >50% payout ratio can be maintained in FY24E, this translates into 10.8%/13.6% dividend yield in FY23/24E. With ~HK$1.1bn net cash on hand (~72% of total market cap) in FY23, and expect stable cash inflow ahead would provide a solid foundation for TK's long-term development. In view of TK's strong financial position, we still regard TK as a good defensive play in industrial universe, we reiterate TK's rating at BUY. As TK's net profit normally skewed to 2H (40/60 split on average in FY17-19), based on our current FY24E net profit forecast, we expect TK would be able to issue positive profit alert in late 2Q24/ early 3Q24. With multiple catalysts ahead and healthy financial position, we expect TK would receive increasing investors' interest before 1H24 result (due in late-Aug)

The above content is for informational or educational purposes only and does not constitute any investment advice related to Futu. Although we strive to ensure the truthfulness, accuracy, and originality of all such content, we cannot guarantee it.
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