Company update Electronics components – Kong Kong

     

PC Partner
(01263.HK/1263 HK)
     

High price of Nvidia RTX 20 series hurting demand

Neutral‧Maintained Event
Price as of October 24 (HK$) 2.87 The high prices of Nvidia’s (US) RTX 2080 and 2080 Ti graphics cards are dampening
12M target price (HK$) 2.87 replacement demand, despite much better efficiency and improved 4K gaming
Previous target price (HK$) 6.43 experience with real-time ray-tracing. Although initial sales of these graphics cards look
Revised down (%) 55.4 strong, we are concerned about subsequent sales momentum in 4Q18-1Q19. We had a
Upside (%) 0 business update from management recently, with highlights below.

Impact
Key message   3Q18 results below expectation. 3Q18 sales are expected to drop 30-40% QoQ and
3Q18 results were below expectation, on weak over 40% YoY, on soft demand from the gaming market ahead of the new GPU launch
replacement demand from gamers and and an absence of crypto-mining demand. PC Partner has cut prices to clear inventories,
absence of crypto-mining demand. High prices which led to a drop in gross margin to 6-7% in 3Q18 and a net loss for the period. Amid
of flagship RTX 2080 and 2080 Ti are the US-Sino trade war, the company expects to completely clear inventories of GTX 10
dampening demand from gamers, which is bad series, worth HK$2.6bn as at end-June, by 1Q19.
for new product shipments amid the US-Sino
trade war. If Nvidia (US) does not cut prices of High prices of RTX2080 & 2080 Ti dampening replacement demand. With a
the new GPUs, we expect PC Partner’s sales to reference price of US$999, the flagship RTX 2080 Ti graphics card market prices are
fall off. Maintain Neutral. US$1,100-2,200 due to a supply shortage of GPUs and relatively low production yields.
This price is literally too high for gamers, compared to around US$780 for GTX 1080 Ti.
Trading data Nonetheless, the mid-end RTX 2070 priced at at least US$499, rolled out on October 17,
Mkt cap (HK$bn/US$mn) 1.068 / 136.2 is a more affordable option for gamers. After all, currently no game supports real-time ray
Outstanding shares (mn) 372.1 tracing, a unique feature of Nvidia RTX 20 series, discouraging replacement for gamers.
Thus, we are conservative on PC Partner’s sales momentum in 4Q18F. The company has
Free Float (%) 36.5
revised down 2018F sales growth forecast from 30% to 20% YoY or above.
3M avg. daily trading (mn) 1.19
2.87 –7.55
Preparing for US-Sino trade war. The US’s tariffs of 10% on imports from China apply
52-week trading range (HK$)
to individually-sold graphics cards assembled in China, and the tariffs will rise to 25% in
Performance 3M 6M 12M
2019. PC Partner generated 12.8% of revenue from North and Latin America in 1H18. In
Absolute (%) -56.7 -45.6 -21.8
view of the situation, PC Partner plans to engage a Taiwanese OEM for the assembly of
Relative (%) -45.1 -28.3 -11.8 graphics cards exported to the US.

Share price chart Valuation & Action

Price Close Relative to Hang Seng Index (rhs)
8.40

7.40
216

193
To reflect expected graphics card shipments decline, we revise down 2018-19F net profit
6.40

5.40
169

146
by 17-40%. If Nvidia does not cut prices on RTX 20 series, we expect replacement
demand from gamers to drop off. Based on 3.9x 2019F PE (1 SD below average to reflect
4.40 123

3.40 99

worsening competitive landscape, previously 5.3x), we cut our target price to HK$2.87
2.40 76
70
60
50
40
30
20
10
(previously HK$6.43). With limited upside, we maintain our Neutral rating.
10-17 12-17 02-18 04-18 06-18 08-18

Source: TEJ Risks

Component shortage of graphics cards; higher-than-expected ASP decline.

Key financials and valuations

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Revenue (HK$mn) 5,838 8,555 10,395 8,023 8,566
Gross profit (HK$mn) 591 916 1,260 878 962
Operating profit (HK$mn) 172 383 601 367 456
Net profit (HK$mn) 150 332 484 271 339
EPS (HK$) 0.36 0.77 1.19 0.73 0.91
DPS (HK$) 0.18 0.28 0.39 0.22 0.27
EPS growth (%) 0.0 114.7 54.2 (38.5) 24.9
Christopher Ho, CFA PE (x) 8.0 3.7 2.4 3.9 3.2
852.2878.4401 PB (x) 1.3 1.1 0.7 0.6 0.5
christopher.ho@kgi.com EV/EBITDA (x) 7.3 2.7 1.4 0.4 (0.2)
See the last page for important disclosures. Net debt to equity (%) 21.1 Net cash Net cash Net cash Net cash
Dividend yield (%) 6.2 9.7 13.6 7.6 9.5
Return on average equity (%) 17.6 31.0 34.5 16.0 17.8
Source: Company data KGI Research estimates

October 25, 2018 https://www.kgisia.com.tw/Portal/Report/Index/En/R Powered by the EFA Platform 1

 
 
  
  Hong Kong PC Partner
 

Figure 1: Average price of GTX 1070 Ti graphics card fell Figure 2: Average price of GTX 1060 graphics card fell less
12% from June to October on fall in crypto-mining demand by around 7% from June to October, on a better price to
& gamers’ wait-&-see ahead of RTX 20 series launch performance ratio
GTX 1070 Ti graphics card average price, US$ GTX 1060 graphics card average price, US$
900 500

800 450

700 400

600 350

500 300

400 250
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18

Source: Pcpartpicker; KGI Research Source: Pcpartpicker; KGI Research

Figure 3: PC Partner’s forward PE on de-rating trend

2019F PE, x
8
7
6
5
4
3
2
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18
2019F PE Avg +1 S.D. Avg. -1 S.D. Average
Source: Bloomberg; KGI Research

Figure 4: Breakdown of 2018-19F forecast revisions

2018F 2019F
HK$ mn Revision Previous Diff. (%) Revision Previous Diff. (%)
Rev enue 10,395 11,203 (7.2) 8,023 10,245 (21.7)
Gross profit 1,260 1,423 (11.5) 878 1,202 (27.0)
Operating profit 601 713 (15.7) 367 577 (36.4)
Net profit 484 581 (16.6) 272 451 (39.8)
EPS (HK$) 1.30 1.56 (16.7) 0.73 1.22 (39.9)
Gross margin (%) 12.1 12.7 -0.6ppt 10.9 11.7 -0.8ppt
OP margin (%) 5.8 6.4 -0.6ppt 4.6 5.6 -1.1ppt
Net margin (%) 4.7 5.2 -0.5ppts 3.4 4.4 -1ppts
Source: Company data; KGI Research

October 25, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 2

 
 
  
  Hong Kong PC Partner
 

Figure 5: Peer comparison – Valuation

Company Ticker Price Price performance (%) Market cap PE (x) ROE (x) Yield (%)
10/24 (LC$) 5-day 3-month 6-month 12-month (US$bn) 2018F 2019F 2017 2018F 2018F
Hong Kong
PC Partner Group Ltd 1263 HK 2.87 (7.1) (58.3) (48.4) (20.9) 0.1 2.1 2.4 53.5 40.0 16.4
VST Holdings Ltd 856 HK 3.81 (0.5) (10.8) (1.3) 20.6 0.7 6.0 5.3 18.0 17.3 5.2
Tongda Group Holdings Ltd 698 HK 1.07 (2.7) (34.0) (37.1) (51.1) 0.9 5.6 4.7 19.6 18.5 5.6
Ju Teng International Holdings 3336 hk 1.86 (7.0) 25.7 18.5 (36.9) 0.3 N/A 7.5 (2.4) (0.5) 0.4
Lenov o Group Ltd 992 HK 4.83 (7.3) 12.1 29.8 6.2 7.4 13.7 9.8 10.4 12.5 4.1
Av erage (4.9) (13.1) (7.7) (16.5) 2.3 8.4 6.8 11.4 12.0 3.8
Taiwan
Micro-Star International Co Lt 2377 TT 66.40 (7.3) (37.9) (25.3) (9.2) 1.8 7.6 7.7 25.5 24.6 9.0
Asustek Computer Inc 2357 TT 229.00 (2.6) (12.3) (18.5) (10.7) 5.5 12.6 10.7 9.1 7.7 6.0
Gigabyte Technology Co Ltd 2376 TT 37.60 (7.5) (43.3) (41.7) (17.0) 0.8 6.8 8.9 16.5 13.5 11.3
ASROCK Inc 3515 TT 47.85 (4.0) (29.7) (35.9) (40.8) 0.2 10.5 9.3 11.5 10.0 8.9
Biostar Microtech Internationa 2399 TT 9.54 (6.0) (44.0) (52.8) (31.9) 0.1 N/A N/A 6.7 N/A N/A
Acer Inc 2353 TT 22.25 (0.9) (13.3) (0.3) 43.3 2.2 17.9 16.0 4.6 6.3 3.0
Av erage (4.2) (28.5) (29.8) (11.4) 1.8 11.1 10.5 12.3 12.4 7.6
US
NVIDIA Corp NVDA US 199.41 (18.0) (20.8) (8.0) 3.0 121.2 25.2 22.7 55.4 51.1 0.3
Adv anced Micro Dev ices Inc AMD US 22.79 (16.5) 42.0 134.7 84.8 22.2 47.9 32.5 48.3 53.3 0.0
Super Micro Computer Inc SMCI US 14.70 8.5 (36.4) (16.5) (32.7) 0.7 7.3 5.8 9.1 N/A N/A
Intel Corp INTC US 42.42 (7.6) (19.1) (17.4) 4.0 195.6 10.2 10.1 24.0 22.5 2.7
Av erage (5.9) (21.4) (9.9) (2.9) 84.9 22.7 17.8 34.2 42.3 1.0
Total Average (6.4) 8.2 13.5 (15.8) 24.0 13.4 10.9 20.7 21.3 5.6
Source: Bloomberg; KGI Research

October 25, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 3

 
 
  
  Hong Kong PC Partner
 

Figure 6: Company profile Figure 7: Revenue mix in 2017

PC Partner was initially part of the computer division of VTech Segment revenue weighting, percent

(303 HK), and its founders bought out the business in Hong Kong EMS business
PC related
in 1997. The company produces and sells computer electronics products 6.1
10.1
products under its own brands, Zotac, Inno3D and Manli, and
provides electronics manufacturing services (EMS) for ODM/ OEM
customers. Key products include video graphics card (VGC),
83.7
motherboards and mini PCs. The company produces Nvidia-based Video graphics
cards
(US) VGCs under the Zotac brand, and manufactures AMD-based
(US) VGCs for Sapphire Technology (HK). The company was listed
on the main board of HKEx in January 2012.
Source: KGI Research Source: Company data; KGI Research

Figure 8: Sales Figure 9: EPS

Sales, HK$mn EPS, HK$
12,000 1.40
10,395 1.19
10,000 1.20
8,555 8,566
8,023 1.00 0.91
8,000
0.77
0.80 0.73
5,838
6,000
0.60
4,000
0.40 0.36

2,000 0.20

0 0.00
Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

Source: KGI Research Source: KGI Research

Figure 10: Gross Margin Figure 11: Rolling PE

Gross margin, percent 9.0

12.50% 8.0
12.1%
12.00% 7.0

11.50% 6.0
11.2%
10.9% 5.0
11.00%
10.7%

10.50% 4.0
10.1%
10.00% 3.0

2.0
9.50%
Jan-18F

Apr-18F

Jul-18F

Oct-18F
Jan-17A

Apr-17A

Jul-17A

Oct-17A

9.00%
Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

Source: KGI Research Source: KGI Research

Figure 12: Operating Margin Figure 13: Rolling PB

Operating Margin, percent 2.40
2.20
6.10%
5.8% 2.00
5.60% 1.80
5.3%
1.60
5.10%
1.40
4.6%
4.60% 4.5%
1.20
1.00
4.10%
0.80
3.60% 0.60

2.9%
0.40
3.10%
Jan-18F

Apr-18F

Jul-18F

Oct-18F
Jul-17A
Jan-17A

Apr-17A

Oct-17A

2.60%
Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

Source: KGI Research Source: KGI Research

October 25, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 4

 
 
  
  Hong Kong PC Partner
 

Balance sheet Profit & loss

HK$mn Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F HK$mn Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Total assets 2,905 4,099 5,177 4,836 5,161 Revenue 5,838 8,555 10,395 8,023 8,566
Current assets 2,820 3,991 5,061 4,717 5,039 Cost of goods sold (5,247) (7,639) (9,135) (7,145) (7,604)
Cash & ST securities 790 1,456 1,961 2,460 2,718 Gross profit 591 916 1,260 878 962
Inventory 1,281 1,349 1,644 1,215 1,293 Other operating income - - - - -
Accounts receivable 748 1,186 1,455 1,043 1,028 Operating expenses (419) (533) (659) (511) (506)
Other current assets 0 0 0 - (0) Operating profit 172 383 601 367 456
Non-current assets 85 108 117 119 122 Other exceptional items -
LT investments 21 37 37 37 37 Income from associates -
Net fixed assets 55 59 68 70 73 Interest expense (14) (24) (51) (59) (71)
Total other assets 9 12 12 12 12 Pre-tax profit 158 359 550 308 385
Total liabilities 1,972 2,891 3,581 3,044 3,152 Current taxation (8) (27) (66) (37) (46)
Current liabilities 1,972 2,891 3,581 3,044 3,152 Minorities 0
Accounts payable 961 1,488 1,827 1,429 1,521 Extraordinary items - 0 - - -
Interest bearing ST liabilities 988 1,351 1,702 1,563 1,579 Net profit 150 332 484 271 339
Other current liabilities 23 52 52 52 52 EBITDA 188 401 619 385 475
Non-current liabilities 0 0 0 0 0 EPS (HK$) 0.36 0.77 1.19 0.73 0.91
Long-term debt 0 0 0 0 0
Other L-T liabilities 0 - - - - Cash flow
Total equity 933 1,208 1,596 1,792 2,009 HK$mn Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Shareholders' funds 933 1,208 1,596 1,792 2,009 Operations cash flow 20 (0) 277 733 386
Minority interests (0) (0) (0) (0) (0) Operating profit 172 383 601 367 456
Preferred shareholders funds - - - - - Depreciation & amortisation 16 18 17 18 19
Decrease in working capital (336) 50 (225) 444 29
Key ratios Other operating cashflow 182 (400) - - -
Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Interest paid (14) (24) (51) (59) (71)
Growth Tax paid (0) (27) (66) (37) (46)
Revenue growth 22.8% 46.5% 21.5% (22.8%) 6.8% Investing cash flow (26) - (26) (20) (21)
Operating profit growth 122.9% 57.0% (39.0%) 24.3% Sale of ST investment -
EBITDA growth 868.9% 113.3% 54.1% (37.8%) 23.4% New investments -
Net profit growth 121.2% 45.7% (44.0%) 24.9% Capital expenditure (24) (35) (26) (20) (21)
EPS growth 114.7% 54.2% (38.5%) 24.9% Others investing cashflow (2) 35 (0) 0 (0)
Profitability Free cash flow (180) 387 295 764 427
Gross profit margin 10.1% 10.7% 12.1% 10.9% 11.2% Financing cash flow 7 - 255 (214) (106)
Operating margin 2.9% 4.5% 5.8% 4.6% 5.3% Increase in short term debt 4 233 481 (139) 16
EBITDA margin 3.2% 4.7% 6.0% 4.8% 5.5% Increase in long term loans - - - - -
Net profit margin 2.6% 3.9% 4.7% 3.4% 4.0% New ordinary shares issued 17
Return on average assets 5.8% 9.5% 10.4% 5.4% 6.8% Ordinary dividends paid (15) (62) (227) (76) (122)
Return on average equity 17.6% 31.0% 34.5% 16.0% 17.8% Other financing cashflow (0) (171) - - -
Stability Total cash generated 0 (0) 505 499 259
Gross debt to equity 105.8% 111.8% 106.6% 87.2% 78.6%
Net debt to equity 21.1% Net cash Net cash Net cash Net cash ROIC
Interest coverage (x) 12.1 15.9 11.8 6.3 6.4
Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Interest & ST debt coverage (x) 0.1 0.2 0.2 0.1 0.2
1 - COGS/revenue 10.1% 10.7% 12.1% 10.9% 11.2%
Cash flow interest coverage(x) 1.4 (0.0) 5.4 12.5 5.4
- Operating exp./revenue 7.2% 6.2% 6.3% 6.4% 5.9%
Cash flow/int. & ST debt (x) 0.0 (0.0) 0.2 0.5 0.2
= Operating margin 2.9% 4.5% 5.8% 4.6% 5.3%
Current ratio (x) 1.4 1.4 1.4 1.5 1.6
Quick ratio (x) 0.8 0.9 1.0 1.2 1.2
1 / (Working capital/revenue 0.2 0.1 0.1 0.1 0.1
Net debt (HK$mn) 197 (103) (257) (895) (1,137)
+ Net PPE/revenue 0.0 0.0 0.0 0.0 0.0
Per share data
+ Other assets/revenue) 0.0 0.0 0.0 0.0 0.0
EPS (HK$) 0.36 0.77 1.19 0.73 0.91
= Capital turnover 5.3 8.0 8.0 9.3 10.3
CFPS (HK$) 0.05 (0.00) 0.68 1.97 1.04
BVPS (HK$) 2.23 2.72 4.29 4.82 5.40
Operating margin 2.9% 4.5% 5.8% 4.6% 5.3%
SPS (HK$) 13.92 19.80 25.45 21.56 23.02
x Capital turnover 5.3 8.0 8.0 9.3 10.3
EBITDA/share (HK$) 0.45 0.93 1.51 1.03 1.28
x (1 - tax rate) 95.2% 92.5% 88.0% 88.0% 88.0%
DPS (HK$) 0.18 0.28 0.39 0.22 0.27
= After-tax ROIC 14.7% 33.2% 40.7% 37.6% 48.2%
Activity
Source: Company data, KGI Research estimates
Sales / avg assets 2.24 2.44 2.24 1.60 1.71
Days receivable 46.9 50.6 51.1 47.5 43.9
Days inventory 89.4 64.5 65.7 62.1 62.2
Days payable 67.1 71.1 73.0 73.0 73.2
Cash cycle 69.2 44.0 43.8 36.5 32.9
Source: Company data, KGI Research estimates

October 25, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 5

 
 
  
  Hong Kong PC Partner
 

PC Partner – Recommendation & target price history

Price Close
Date Rating Target Price
8.40 Recommendations & Target Price
2018-08-28 Neutral 6.43 6.09
5.10

6.10

6.60

7.70

9.00

6.43
2018-07-19 Outperform 9.00 7.09
7.40
2018-04-12 Outperform 7.80 5.16

7.80
6.40 2018-04-09 Outperform 7.70 5.10
2018-01-25 Outperform 6.60 4.73
5.40
2018-01-05 Outperform 6.10 4.16
4.40 2017-09-25 Outperform 5.10 2.91
2017-08-31 Outperform 5.10 3.78
3.40

Outperform Neutral Underperform Restricted Not Rated

2.40
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18

Source: TEJ, KGI Research

KGI Locations China Shanghai Room 1507, Park Place, 1601 Nanjing West Road, Jingan District,

Shanghai, PRC 200040

Shenzhen Room 24D1, 24/F, A Unit, Zhen Ye Building, 2014 Bao’annan Road,

Shenzhen, PRC 518008

Taiwan Taipei 700 Mingshui Road, Taipei, Taiwan

Telephone 886.2.2181.8888 ‧ Facsimile 886.2.8501.1691

Hong Kong 41/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong

Telephone 852.2878.6888 Facsimile 852.2878.6800

Thailand Bangkok 8th - 11th floors, Asia Centre Building

173 South Sathorn Road, Bangkok 10120, Thailand

Telephone 66.2658.8888 Facsimile 66.2658.8014

Singapore 4 Shenton Way #13-01 SGX Centre 2

Singapore 068807

Telephone 65.6202.1188 Facsimile 65.6534.4826

KGI Ratings Rating Definition

Outperform (OP) We take a positive view on the stock. The stock is expected to outperform the expected total
return* of the KGI coverage universe in the related market over a 12-month investment horizon.

Neutral (N) We take a neutral view on the stock. The stock is expected to perform in line with the expected
total return* of the KGI coverage universe in the related market over a 12-month investment
horizon.

Underperform (U) We take a negative view on the stock. The stock is expected to underperform the expected total
return* of the KGI coverage universe in the related market over a 12-month investment horizon.

Not Rated (NR) The stock is not rated by KGI Securities.

Restricted (R) KGI policy and/or applicable law regulations preclude certain types of communications, including an
investment recommendation, during the course of KGI's engagement in an investment banking
transaction and in certain other circumstances.

Total return = (12M target price - current price) / current price

Disclaimer This information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its
completeness or accuracy. It is not an offer to sell or solicitation of an offer to buy any securities.

KGI Asia Limited and its affiliates and their officers and employees may or may not have a position in or with respect to the securities
mentioned herein. KGI Asia Limited (or one of its affiliates) may from time to time perform investment banking or other services or
solicit investment banking or other business for any company mentioned in this report. All opinions and estimates included in this
report constitute our judgment as of this date and are subject to change without notice.

October 25, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 6