CDW Holding Limited - WordPress.com · 2016-10-24 · CDW Holding Limited Singapore February 17,...

Monday, 24 October 2011

INITIATION REPORT Singapore

CDW Holding Limited (CDW SP; CDWH.SI )

Please see important disclosures at the end of this publica on

Renfred TAY [email protected] +65 6236 2557

Source: Bloomberg

12‐Mth CDW SP (Blue) vs. FSSTI

Shaping up for a 2015 rebound We ini ate coverage on CDW, a Japanese manufacturer of LCD backlight units (BLU) to a major Japanese LCD manufacturer, with produc on facili es based in China. The company has previously focused its BLU produc on on gamesets, but is now posi oned for a switchover to smartphones. Transitory disappointment for FY14. The demand for gamesets is on a downtrend as consumers switch to playing their games on smartphones from tradi onal handheld gamesets. CDW’s a empt to switch to smartphones hit a snag in 2014 due a supply shortage in light guide panels (LGP) that are 0.3mm or thinner. We are expec ng FY14’s performance to be weak as a result. Strong comeback in FY15. CDW will be injec ng RMB15m (c.US$2.4m) into its key supplier for LGPs to ease its supply bo leneck. This should secure about 24m LGP units (or about 60% of total BLU produc on in 2013) per year for CDW. Higher BLU ASP is also expected for smartphone BLUs. Based on our produc on projec on and ASP for FY15F, we are expec ng FY15F core profits to rise back to US$9.6m from US$6.7m in FY14F (+42% yoy). Get paid in USD while you wait. CDW’s USD dividends should also be a major boon for investors, given the expected USD apprecia on against SGD. Dividend pay‐out has also been increasing since FY09 from 0.5 UScts to 1.2 UScts in FY12 and FY13. CDW has a minimum pay‐out ra o of 40% of net profit and tries to at least match the same pay‐out as the previous year. Although we expect a weak set of results for FY14, we believe the company will be able to maintain its 1.2 UScts pay out (8+% yield), given its large net cash posi on, and strong cash flows. A rac ve valua on. CDW is currently trading at 7.2x FY15F P/E, s ll very a rac ve given 1) Its impending turnaround with a 47% growth in core net profit in FY15F, 2) its strong balance sheet and cash flows 3) its high dividend yield that is likely to be maintained, 4) dividends paid in USD (USD apprecia on vs. SGD since 2012) and 5) net cash of approx. S$0.13 per share vs. share price of S$0.196. We believe a re‐ra ng of the stock is on the cards as more discover this hidden gem. Our target price for CDW is set at S$0.25 based on 9x FY15F P/E.

Buy Price as of 16 Feb 2015 0.196

12M target price (S$) 0.250

Previous target price (S$) ‐

Ups ide (%) 27.6

Trading data

Market Cap (S$m) 92.9

Issued Shares (m) 473.9

Ave Dai ly Traded

(3‐Month) Vol / Val 0.7m / S$0.1m

52 week lo / hi S$0.13 / S$0.20

Free Float 47.1%

Major Shareholders

Mikuni Co Limited 50.6%

Koichi Urano 0.6%

Financials

YE Dec (US$ m) 2012 2013 2014F 2015F 2016F

Revenue 196.4 175.1 145.0 179.6 223.2EBITDA 21.4 15.7 10.5 13.9 16.6Core PATMI 11.4 9.3 6.7 9.6 11.8Core EPS (UScts) 2.4 2.0 1.4 2.0 2.5Core EPS growth (%) 92.2 ‐17.4 ‐28.7 42.0 23.5Core P/E (x) 6.6 8.0 11.0 7.2 5.7DPS (UScts) 1.2 1.2 1.2 1.2 1.2Dividend Yield (%) 7.7 7.7 7.7 8.4 8.5EV/EBITDA (x) 2.1 2.9 4.4 3.3 2.8Net Gearing (x) Net Cash Net Cash Net Cash Net Cash Net CashP/B (x) 1.2 1.1 1.0 0.9 0.8ROE (%) 18.1 16.4 9.6 12.9 14.8Source: Company data. KGI Fraser

0.02

0.07

0.12

0.17

0.22

2,700

2,900

3,100

3,300

3,500

3,700

3,900

Jan‐13

Apr‐13

Jul‐13

Oct‐13

Jan‐14

Apr‐14

Jul‐14

Oct‐14

Jan‐15

$ 222

Singapore CDW Holding Limited

February 17, 2015 2

Table of Contents

Page

Company overview ............................................................................. 3

Transi oning from gamesets to smartphones ..................................... 7

Strong balance sheet and cash flows ................................................... 9

A rac ve dividends .......................................................................... 11

Forecast and assump ons ................................................................ 12

Valua on .......................................................................................... 16

Key catalysts and risks ...................................................................... 18

Summary of Financials ...................................................................... 19

Appendices: ..................................................................................... 21

Board of directors ........................................................................ 21

Key management ......................................................................... 23

$ 333


February 17, 2015 3

Company Overview History CDW was founded in the early 1990's as a small trading and sourcing company for large Japanese companies in Hong Kong. From its humble beginnings, CDW has grown into a major partner to its customers in Hong Kong and the PRC. Today, they have 7 factories strategically located in Shanghai, Suzhou and Dongguan, employing over 3,000 people. CDW was listed on the mainboard of the SGX in January 2005, with its headquarters s ll located in Hong Kong. Its business ac vity in its present state involves the produc on and trade of a wide range of niche precision components including, LCD backlight units (BLUs) metal and plas c frames, flexible printed circuits and other precision accessories. Its products are widely used in different types of equipment including, mobile communica on devices, consumer/IT/entertainment equipment, office equipment and other electrical appliances. Products LCD backlight units (BLUs) CDW produces small to medium sized LCB BLUs which are used in mobile communica on, consumer IT and entertainment devices. BLU is a customised component in the LCD module, which provides the light source and controls the ligh ng and brightness of the LCD. The diagram below details the typical components that make up the BLU. Most of CDW’s BLU products are used in gamesets and smartphones.

Frame products CDW also produces small to large sized high precision metal and plas c frames and reflectors for a wide range of equipment including notebook monitors, mobile phones, gamebox entertainment devices and GPS navigators. The frame products are mainly used for the support and fixing of the LCD panel which require specific customiza on depending on the design and the produc on processes of its customers.

Figure 1: LCD BLU module and its applica ons

Source: Company

$ 444


February 17, 2015 4

Flexible printed circuits CDW sources flexible printed circuits for its customers, which are used for the produc on of a wide range of equipment including mobile communica on, consumer IT and entertainment equipment.

Other precision accessories CDW produces a wide range of customized labels, shock absorbers, insulators and other precision accessories for a wide range of office equipment and electrical appliances including photocopiers, printers, TV monitors, projectors, microwave oven, etc.

Figure 2: Frame products and its applica ons

Source: Company

Figure 3: Flexible printed circuits and its applica ons

Source: Company

$ 555


February 17, 2015 5

Figure 4: Other precision accessories and its applica ons

Source: Company

Figure 5: Summary of the applica ons of CDW’s precision component products across different industries

Source: Company

$ 666


February 17, 2015 6

Opera ng segments CDW’s opera ons are categorised into 3 segments – 1) LCD BLU, 2) Office automa on, 3) LCD parts and accessories. LCD BLU makes up the bulk of CDW’s revenue and opera ng profits. In FY13, LCD BLUs accounted for 69% of CDW’s total revenue and 97% of its opera ng profits. The other two segments were opera ng at around breakeven level for FY13. The focal point of our report will on CDW’s LCD BLUs opera ng segment since it is the main driving force behind its business.

Figure 6: Revenue contribu on (US$m)

Source: Company

Figure 7: EBIT contribu on

Source: Company

77.0 52.6 63.9 111.5 125.4 121.5

27.5 25.1 26.2 25.4 22.1

23.0 50.1 29.6 31.8 36.2 49.0

30.6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

LCD backlight units Office automation (Precision parts)

LCD parts and accessories

(10.0)

(5.0)

‐

5.0

10.0

15.0

20.0

25.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

US$

m

LCD backlight units Office automation

LCD parts and accessories Unallocated corporate expense

$ 777


February 17, 2015 7

Transi oning from gamesets to smartphones Worldwide handheld gaming devices losing out to smartphones Mobile devices are certainly taking over the tech world, but not just any mobile devices ‐‐ smartphones and tablets are pushing handheld gaming devices out of the spotlight. A study conducted by ABI Research showed that more portable gamers are looking to smartphones and tablets for their gaming needs rather than handheld gaming devices like Nintendo's 3DS and Sony's Playsta on Vita. Another study by IHS iSupply in 2012 predicted a similar trend; this trend has panned out as predicted and is currently s ll in play.

As a result of the downturn in demand for handheld gaming devices, and the con nued growth in smartphone demand, CDW is transi oning from its past focus on gamesets to smartphones. Transitory disappointment in FY14 In 2014, CDW tried to shi the focus of its BLU produc on towards the high‐end smartphones segment. Such phones required ultrathin light guide panels (LGP) (a key component of the BLU) that are 0.3mm or thinner. However, due to low yield rates and technology within the pool of exis ng LGP suppliers, the industry was in short supply of such ultrathin LGPs. As a result, CDW’s handset BLU produc on was disrupted, and prevented it from making a smooth transi on into increasing its handset BLU produc on as the produc on of gameset BLU fell.

Figure 8: Worldwide handheld gaming vs. mobile handsets shipments (mil of units)

Source: IHS iSupply Research

$ 888


February 17, 2015 8

Strong comeback in 2015 During the middle of 2014, CDW found a new supplier that could supply it with the required LGPs. This supplier, Suzhou Pengfu Photoelectric Technology Company Limited (Pengfu) is new to the scene and was set up by the former produc on heads of the Japanese companies that were able to produce LPS that were 0.3mm or thinner. This supplier has since become an approved supplier of CDW’s major BLU customer. CDW has on 27 Jan 2015, announced the acquisi on of 25% equity interest in Pengfu for RMB15m (c.US$2.4m). The proceeds from this cash‐for‐equity injec on will be reinvested into buying equipment and machinery to double Pengfu’s LGP produc on capacity to two million units per month from its 2014 year‐end capacity of one million units. This addi onal capacity is expected to be produc ve around the end of March 2015. In addi on to the securing of LGPs from the supplier, CDW has also suggested that they could also buy machines and produce the LGPs on their own (if they are able to secure even more orders for their BLUs), with its supplier providing opera onal exper se for a fee. Given the supply shortage for ultrathin LGPs, we believe that the player who is able to secure a steady supply of such LGPs will win orders for handset BLUs. We are therefore posi ve on CDW securing more handset BLU orders, come 2Q15, and consequently a much stronger FY15F set of results that could exceed FY13’s performance. Please refer to the sec on, “Forecasts and assump ons”, for more details on CDW’s expected performance.

Figure 9: CDW BLU produc on volume

Source: Company

31.4

25.6 28.1

42.6 39.3

32.3

12.0

15.9

0.7 2.5

8.1 6.9 8.0 6.0

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 9M14

Mill

ion

s o

f u

nit

s

Gamesets (incl cam and GPS) Handsets

$ 999


February 17, 2015 9

Strong balance sheet and cash flows An already strong balance sheet that keeps improving CDW has a very clean balance sheet. Its cash hoard has been increasing in the last few years even as total debt con nues to fall and as dividends paid increased. Net cash con nued to grow in 2014 with its most recent quarter net cash at US$47.2m, even higher than FY13’s US$44.4m.

Through our discussions with management we understand that CDW’s long‐term capital structure is unlikely to change. Long‐term debt is likely to remain at FY13 levels. We also understand that long‐term debt was taken (locked in at less than 2% p.a. for the next 2 years) firstly to maintain a banking rela onship with the Japanese banks, and also to fund its HQ in Hong Kong, which is more

Figure 10: Cash vs. debt vs. dividends paid

Source: Company

29.9

35.8 37.7

45.5

53.3 51.5

13.3 16.2 15.9 14.7

11.5 7.2

2.5 3.0 3.0 3.0 4.3 5.7

‐

10.0

20.0

30.0

40.0

50.0

60.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

US$

m

Cash Total debt Dividends paid

Figure 11: Net cash trend

Source: Company

16.6 19.6

21.8

30.8

41.8 44.4

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

US$

m

Net cash

$ 101010


February 17, 2015 10

of a cost centre, before the annual up‐streaming of dividends from its subsidiaries in China. Short term debt on the balance sheet is largely from trade financing and could fluctuate depending on its business ac vity. Most of CDW’s short‐term debts are usually due within a month at interest rates at less than 1% p.a.

Always been very cash genera ve CDW has always been cash genera ve and has rarely seen years with nega ve cash flow. Both free cash flows and cash flows from opera ons before changes to working capital had always been posi ve.

Figure 12: Debt breakdown

Source: Company

Figure 13: Cash flows

Source: Company

11.6

9.0 8.8

10.8

5.6

3.5

1.7

7.2 7.0

3.9

5.8

3.6

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

US$

m

ST debt LT debt Total debt

7.8 6.6

9.0

13.7

24.1

14.2

8.4

5.1

2.1

10.7

22.6

2.4

‐

5.0

10.0

15.0

20.0

25.0

30.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

US$

m

Operating CF before chng in WC Free cash flow to firm

$ 111111



A rac ve dividends CDW’s dividends are paid in USD, the preferred currency to be exposed to at the moment, given the rising USD trend against SGD, at half‐yearly intervals. It is currently yielding 8+% (based on FY13 pay‐out of 1.2 UScts). Rising dividend trend As a result of its strong cash flows and improving balance sheet, CDW has been able to increase its dividend pay‐out since 2009. Given the fact that the USD had been apprecia ng against the SGD since 2012, the same 1.2 UScts pay‐out for FY13 would have been even higher in SGD terms when compared to the same 1.2 UScts pay‐out in FY12.

Dividend likely to be maintained CDW has a dividend pay‐out policy of at least 40% of net profit. In addi on, we also understand that it tries not to pay less than the previous year’s dividend. Given its exis ng strong cash flows and the cash it has amassed from previous years, we believe FY14’s dividend pay‐out will likely be maintained even though we are expec ng a weak set of results for FY14. CDW has, thus far, paid out an interim dividend of 0.5 UScts in 2014, which is unchanged from FY12 and FY13. We are therefore, confident that a final dividend of 0.7 UScts (also unchanged vs. FY12 and FY13) will be achieved for FY14. At an expected yield of 8+%, we believe investors are very well rewarded while wai ng for a pre y visible turnaround in its FY15 business.

Figure 14: Dividends

Source: Company

0.008

0.005 0.006

0.007

0.012 0.012

‐

0.002

0.004

0.006

0.008

0.010

0.012

0.014

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

US$

Interim DPS Final DPS Total DPS

$ 121212



Forecasts and assump ons BLU produc on volume CDW had been focusing on gameset BLU produc on previously, despite the rising trend in global smartphone shipments. The ra onale to s ck to gameset produc on, which we believe are reasonable, were – 1) Lower opera onal risks from more stable (than smartphones) three‐month forecast from its customer. The produc on of BLUs is labour intensive and it is more difficult to manage the scaling up and down of a huge labour force in response to changes in volume forecasts. 2) The volume requirements and margins for gameset produc on match up well with CDW’s size. As men oned in the earlier segment, during 2014, the big decline in gameset demand in favour of smartphones due to the change in consumer usage pa erns prompted CDW to move their produc on strategy towards high‐end smartphone BLUs. Volume produc on for high‐end smartphone BLUs tend to be lower than mass market ones and would s ll suit CDW’s size. However, these high‐end smartphone BLUs required LGPs that were 0.3mm or thinner; a thickness that was not achievable by many LGP suppliers in the market. CDW’s inability to secure these ultrathin LGPs resulted in a bo leneck in its produc on. As a result, the produc on volume for handsets BLUs remained low at only 6 million units as of 9M14. Also men oned earlier, CDW’s new supplier, Pengfu (already approved by its customer), could supply them with them with the required ultrathin LGPs. Pengfu started out with three machines ini ally and gradually increased its capacity in the second half of 2014. At the end of 2014, Pengfu had 7 machines that could produce these LGPs, more than double its ini al capacity. With CDW’s investment, Pengfu will further increase its machine count by another 8 machines, bringing it to a total of 15 machines. These 15 machines are es mated to be able to produce two million LGPs per month (or an annual run‐rate of 24m LGPs). These new addi ons are expected to be up and running by the end of March 2015. In addi on, management also explained that it could also buy these machines and produce LGPs on their own, with its current supplier providing management exper se to run them, in return for a fee. Given the increase in supply for LGPs in 4Q14, we are expec ng a higher produc on rate for handset BLUs at CDW. Therefore, we are forecas ng produc on volume of 9m handset BLUs and 16m gameset BLUs (handset – 6m units, gameset – 12m units for 9M14) for FY14. For FY15F, we conserva vely project gameset BLU volume to be 8m units, and handset BLUs to be 25m units (9 months of 2 million LGPs per month from supplier + addi onal 7 million LGPs produced in‐house). We also forecast handset BLU produc on to increase to 40 million units in FY16F (from both, higher supplier/in‐house capacity for LGPs). CDW’s own BLU capacity is 72 million units p.a. and is therefore, not a problem for the next few years, based on our forecast produc on levels.

$ 131313



BLU average selling prices BLU ASP has risen in 2014 as BLUs were being produced for larger screen sizes. To our understanding, ASPs in 2014 for gameset BLUs were approximately US$3.50 per unit while handset BLUs commanded approximately US$4.00. BLU ASP for 9M14 was US$3.86, with a total of 18 million BLUs produced and US$69.6m sales booked. We expect such BLU ASPs to be maintained for the next couple of years before displays requiring such high specs become commodi sed.

Revenue forecast Derived from our volume forecast and ASP assump ons for LCD BLUs, we are expec ng the LCD BLU segment to book revenues of US$95m (‐22% yoy) and US$129m (+35% yoy) for FY14F and FY15F respec vely. For the office automa on segment, we are expec ng flat revenue growth in FY14F and a 4% yoy growth to US$24m in FY15F. For the LCD parts and accessories segment, we are expec ng a 12% yoy decline in revenue to US$27m for FY14F and flat growth going forward.

Figure 15: BLU produc on volume and u lisa on rate forecast

Source: Company, KGI Fraser

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014F FY2015F FY2016F FY2017F

Production capacity (m units/year) 72.0 72.0 72.0 72.0 72.0 72.0 72.0 72.0 72.0 72.0

Gamesets (m units) (incl cam and GPS) 31.4 25.6 28.1 42.6 39.3 32.3 16.0 8.0 4.0 4.0

Handsets (m units) 15.9 0.7 2.5 8.1 6.9 8.0 9.0 25.0 40.0 48.0

LCD BLUs produced 47.3 26.3 30.6 50.7 46.2 40.3 25.0 33.0 44.0 52.0

Utilisation rate 66% 36% 43% 70% 64% 56% 35% 46% 61% 72%

Figure 16: BLU ASP trend and forecast


1.632.00 2.09 2.20

2.713.01

3.80 3.90 3.90 3.95

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

US$

ASP (US$)

$ 141414



Earnings forecast Despite higher expected BLU ASPs, gross margins is es mated to remain unchanged at 22.1% for FY14F, with larger BLU sizes commanding lower margins (as it requires a larger propor on of materials vs. other fixed costs), offset, somewhat by cheaper LGP prices from its new supplier (CDW was paying a premium for LGPs from a non‐listed supplier that was also making BLUs for the same customer). We are also es ma ng gross margin to rise slightly to 22.5% in FY15F and FY16F to account for be er economies of scale with higher produc on volume.

Figure 17: Revenue forecast


154.6

107.3

121.9

173.1

196.4 175.1

145.0

179.6

223.2

257.8

‐

50.0

100.0

150.0

200.0

250.0

300.0

US$

m

LCD backlight units Office automationLCD parts and accessories Total

Figure 18: Gross margin assump ons


32.2 25.3 27.6 34.8 45.9 38.6 32.0 40.4 50.2 57.5

20.8%

23.6%

22.7%

20.1%

23.4%

22.1% 22.1%

22.5% 22.5% 22.3%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

‐

50.0

100.0

150.0

200.0

250.0

300.0

US$

m

Revenue Gross profit Gross profit margin

$ 151515



At the bo om‐line level, we are expec ng a weak FY14F followed by a strong

recovery in FY15F. We are expec ng FY14F core net profit to be US$6.7m (‐28%

yoy) and a rebound to US$9.6m (+42% yoy) in FY15F. FY14F‐FY17F core net

profit is projected to grow at a CAGR of 27%.

Figure 19: Core net profit forecast


0.1 0.3

3.4

6.2

11.4

9.3

6.7

9.6

11.8 13.7

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

EBIT Core net profit Core net margin

$ 161616



Valua on CDW is currently trading at 7.2x FY15F P/E; under‐priced, we believe, given its FY14F to FY17F core net profit CAGR of 27%, expected dividend yield of 8+% and strong balance sheet and cash flows. Trading history – expect re‐ra ng to 9x FY15F P/E In this sec on we shall examine CDW’s historical trading valua on in forward P/E terms in the last 5 years. The P/E ra o of CDW two years before 2010 would probably not be meaningful as the company was opera ng at breakeven level; P/B would most probably be the preferred valua on measure used by investors back then. However, CDW’s earnings outlook in 2010 improved significantly, and its stock was trading at an average forward P/E of about 9x FY10’s earnings. This was right at the start of a mul ‐year growth spurt which ended in 2013. With a brief transi on period between 2013 and the end of 2014 (possibly 1Q15) expected to be over pre y soon, we believe CDW should con nue to re‐rate, in forward P/E terms, back towards 9x like in 2010, as its business rebound unfolds.

Growing net cash posi on understates CDW’s value CDW is in a net cash posi on of US$47.2m (approximately S$63.7m) or 66% of its market capitalisa on of S$93m. Ex‐cash, CDW is actually trading at only 2.2x FY15F P/E. Any asset at such P/E (even when not ex‐cash at 7.2x) that is growing at a 3‐year CAGR of 27% must be a bargain buy. In other words, if an investor were to fully acquire CDW today, the acquirer could essen ally pocket all the cash and recoup all its capital paid for the acquisi on in less than 2.2 years!

Figure 20: Historical forward trading P/E

Source: Bloomberg, KGI Fraser

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan‐10

Apr‐10

Jul‐10

Oct‐10

Jan‐11

Apr‐11

Jul‐11

Oct‐11

Jan‐12

Apr‐12

Jul‐12

Oct‐12

Jan‐13

Apr‐13

Jul‐13

Oct‐13

Jan‐14

Apr‐14

Jul‐14

Oct‐14

Jan‐15

1‐yr fwd PE Average +1 SD ‐1 SD

$ 171717



Peer Comparison – s ll much cheaper than peers CDW’s listed Japanese BLU producing peers that make small to medium size BLUs include Omron Corp (6645 JP) and Minebea (6479 JP). In fact, these peers are also producing BLUs for the same customer as CDW. Although CDW is much smaller than its Japanese peers in size, we believe it should not be trading at such a big discount in comparison to them, whose forward P/Es are in the high teens, at prices that are mul ple mes of book value, and at an average EV/EBITDA of 9.3x. In fact, CDW’s smaller produc on scale makes it more flexible and allows it to take on smaller scale projects that its larger Japanese peers are not willing to undertake. CDW’s non‐Japanese BLU producing peers include, Coretronic Corp (5371 TT), Radiant Opto‐Electronics (6176 TT), Kenmos Technology (8107 TT), Heesung Electronics (not listed), and Taesan Enginneering Co (not listed). CDW’s Taiwanese listed peers are closer to CDW in terms of market capitalisa on, but are trading at an average forward P/E of 10.5x, at least 1x P/B, and 4.2x EV/EBITDA, while CDW trades at 7.2x FY15F P/E, 1x P/B and at only 1.9x EV/EBITDA. We expect CDW’s general discount to its peers to narrow as the stock con nues to re‐rate in the quarters to come with increasingly posi ve prospects.

Conclusion CDW is currently trading at 7.2x FY15F P/E, s ll very a rac ve given 1) CDW’s impending turnaround with a 47% growth in core net profit in FY15F, 2) its strong balance sheet and cash flows 3) its high dividend yield of 8+% that is likely to be maintained, and 4) dividends paid in USD (further USD apprecia on vs. SGD since 2012) and 5) net cash of approx. S$0.13 per share vs. share price of S$0.196, implying ex‐cash FY15F P/E of only 2.2x. We believe a re‐ra ng of the stock is on the cards as more discover this hidden gem, as its results improve. Our target price for CDW is set at S$0.25 based on 9x FY15F P/E, in‐line with its historical valua on trend.

Figure 21: Peer comparison

Source: Bloomberg, KGI Fraser

Company Bloomberg Price Mkt Cap P/E (x) 1‐yr EPS Op Margin P/B (x) ROE EV/EBITDA P/CF P/FCF Net Grg Dvd Yld

Ticker (lcl curr) (S$m) (1yr fwd) Grwth (%) (%) (MRQ) (%) (x) (TTM) (x) (TTM) (x) (TTM) (%) (%)

Japanese peers

Minebea Co Ltd 6479 JP 1,657 7,568 16.7 1,042.8 8.7 2.8 19.0 9.6 12.5 25.8 71.4 0.7

Omron Corp 6645 JP 4,950 12,313 16.8 52.9 8.8 2.2 13.4 9.1 14.9 28.7 (20.7) 1.4

Simple average 9,941 16.7 547.9 8.7 2.5 16.2 9.3 13.7 27.3 25.3 1.1

Non‐Japanese peers

Coretronic Corp 5371 TT 46.70 1,094 8.3 23.6 3.6 1.1 14.2 3.6 6.0 8.2 (36.6) ‐

Radiant Opto‐Electronics Corp 6176 TT 100.00 2,007 12.7 (12.3) 8.9 2.1 18.8 4.9 6.3 ‐ (68.6) 7.0

Kenmos Technology Co Ltd 8107 TT 21.55 105 ‐ (709.5) (10.8) 1.0 (53.0) ‐ 6.6 15.5 86.2 ‐

Simple average 1,069 10.5 (232.7) 0.6 1.4 (6.7) 4.2 6.3 11.8 (6.3) 7.0

CDW Holding Ltd CDW SP 0.196 93 7.2 42.0 7.0 1.0 12.2 1.9 3.3 3.4 (67.1) 7.7

$ 181818



Key catalysts and risks Catalysts Dividends at least being maintained When CDW announces its 4Q14 results, one of the key items to look out for is the amount of dividend declared. We are expec ng at least US$0.007 to be declared, bringing FY14’s pay‐out to US$0.012 (or unchanged from FY12 and FY13). While dividend pay‐out is expected to remain flat in USD terms, it should be higher than the previous years in SGD terms. As explained earlier in this report, we believe CDW should have no problems mee ng our dividend expecta on. Up ck in handset BLU produc on volume CDW regularly provides updates for its BLU produc on volume in its quarterly results announcements. This allows investors to assess CDW’s BLU produc on ac vity which should directly translate to be er earnings performance. We are expec ng a stronger qoq performance in 4Q14 and 1Q15. However, the real kicker should come in 2Q15 when the new LGP produc on machines are fully deployed and running at full capacity at its supplier’s factory. Risks Unable to secure smartphone BLU orders There will always be a risk of players in the technology supply chain being unable to secure orders. We believe, however such a risk for CDW is somewhat lower because: 1) The produc on of the BLUs will be for its exis ng customer that they have been supplying to for the past 20 years, who have never stopped placing orders with them. 2) Due to the shortage of ultrathin LGPs, orders naturally go to manufacturers that can secure a steady supply of such LGPs. Key customer risk Based on our understanding, about 76% of CDW’s total revenue is derived from one major customer. The loss of business from this customer would almost render CDW’s existence pointless. However we note that shareholders can take huge comfort in knowing that CDW’s liquida on value could be very close to its book value (currently trading at less than book value), given CDW’s low debt level, and high net‐cash posi on that makes up about two‐thirds of its market capitalisa on. Investors’ downside risk is therefore largely capped and greatly skewed to the upside.

$ 191919



Summary of Financials

YE 31 Dec

INCOME STATEMENT (US$ m) 2012 2013 2014F 2015F 2016F

Revenue 196.4 175.1 145.0 179.6 223.2

Cost of sales (150.5) (136.5) (112.9) (139.2) (173.0)

Gross profit 45.9 38.6 32.0 40.4 50.2

Opex (27.4) (24.9) (22.2) (26.5) (33.1)

Others ‐ 2.0 ‐ ‐ ‐

Finance costs (0.3) (0.2) (0.2) (0.2) (0.2)

Profit before tax 18.2 15.5 9.6 13.7 16.9

Income tax expense (6.8) (4.2) (2.9) (4.1) (5.1)

Non‐controlling interests (0.0) (0.0) (0.0) (0.0) (0.0)

Profit after tax and NCI 11.4 11.3 6.7 9.6 11.8

EBITDA 21.4 15.7 10.5 13.9 16.6

EBITDA Margin (%) 10.9 9.0 7.2 7.8 7.5

EPS (UScts) 2.4 2.4 1.4 2.0 2.5

Book Value per Share (UScts) 13.2 14.6 14.62 15.43 16.71

BALANCE SHEET (US$ m) 2012 2013 2014F 2015F 2016F

Cash and cash equivalents 53.3 51.5 64.5 55.8 62.0

Trade and other receivables 27.8 31.6 23.8 29.5 36.7

Inventory 10.5 11.8 9.3 11.4 14.2

Other current assets 5.1 2.0 0.1 0.1 0.1

Property, plant and equipment 19.2 10.1 9.1 8.2 7.5

Other non‐current assets 2.9 2.7 2.7 12.7 12.7

Total Assets 118.8 109.8 109.5 117.8 133.3

Trade and other payables 38.3 30.1 28.7 33.2 42.5

Borrowings: Current 5.2 3.3 3.3 3.3 3.3

Other Current Liabilities 4.4 2.4 2.4 2.4 2.4

Borrowings: Non‐Current 5.4 3.3 3.3 3.3 3.3

Other non‐current Liabilities 2.6 1.7 1.7 1.7 1.7

Shareholders equity 62.9 68.9 70.0 73.9 80.0

Non‐controlling interests 0.0 0.1 0.1 0.1 0.1

Total Liabilities and Equity 118.8 109.8 109.5 117.8 133.3

CASH FLOW STATEMENT (US$ m) 2012 2013 2014F 2015F 2016F

Profit before tax 18.2 15.5 9.6 13.7 16.9

Depreciation 3.5 2.8 1.5 1.4 1.2

Other cash from operations 2.4 (4.2) (0.6) (1.1) (1.5)

Change in working capital 4.5 (9.6) 8.9 (3.4) (0.6)

Interest paid (0.3) (0.2) (0.2) (0.2) (0.2)

Income tax paid (4.4) (6.4) (2.9) (4.1) (5.1)

Others ‐ (0.5) ‐ ‐ ‐

Net Cash from Operations 24.0 (2.5) 16.4 6.2 10.8

(Purchase)/Disposal of PPE (1.3) 5.1 (0.5) (0.5) (0.5)

Other cash from investing (4.4) 5.4 2.7 (8.7) 1.7

Dividends paid (4.3) (5.7) (5.7) (5.7) (5.7)

Debt raised / (repaid) (3.0) (3.4) ‐ ‐ ‐

Equity raised / (purchased) (1.8) 0.8 ‐ ‐ ‐

Other cash from financing (0.4) (0.4) ‐ ‐ ‐

Beginning Cash 45.5 53.3 51.5 64.5 55.8

Foreign Exchange Effect (1.2) (0.9) ‐ ‐ ‐

End Cash 53.3 51.5 64.5 55.8 62.0

$ 202020



KEY RATIOS 2012 2013 2014F 2015F 2016F

Profitability (%)

Gross Margin 23.4 22.1 22.1 22.5 22.5

EBITDA Margin 10.9 9.0 7.2 7.8 7.5

Net Margin 5.8 6.5 4.6 5.3 5.3

ROE 18.1 16.4 9.6 12.9 14.8

ROA 9.6 10.3 6.1 8.1 8.9

ROIC 19.1 17.3 14.7 14.7 15.6

Growth (% Y‐o‐Y)

Revenue 13.5 (10.8) (17.2) 23.9 24.3

EBITDA 70.4 (26.6) (33.2) 32.7 19.4

Net Income 143.6 (0.8) (40.5) 42.0 23.5

EPS 154.4 0.4 (41.3) 42.0 23.5

Financial Structure (x)

Interest coverage 82.7 83.2 56.4 74.8 89.3

Total Debt/Equity 0.2 0.1 0.1 0.1 0.1

Net Gearing Net Cash Net Cash Net Cash Net Cash Net Cash

Market Valuation (x)

Price / Earnings 6.6 8.0 11.0 7.2 5.7

Price / Book 1.2 1.1 1.0 0.9 0.8

Price / Sales 0.4 0.4 0.5 0.4 0.3

EV / EBITDA 2.1 2.9 4.4 3.3 2.8

$ 212121



Appendices

Board of directors

$ 222222



$ 232323



Key management

$


February 17, 2015

Ra ng Defini on KGI Fraser Research’s recommenda ons are based on an Absolute Return ra ng system. BUY >10% total return over the next 12 months HOLD ‐10% to +10% total return over the next 12 months SELL <‐10% total return over the next 12 months

KGI’s Ra ngs

Disclaimer This report is provided for informa on only and is not an offer or a solicita on to deal in securi es or to enter into any legal rela ons, nor an advice or a recommenda on with respect to such securi es. This report is pre‐pared for general circula on. It does not have regard to the specific investment objec ves, financial situa on and the par cular needs of any recipient hereof. You should independently evaluate par cular investments and consult an independent financial adviser before dealing in any securi es men oned in this report. This report is confiden al. This report may not be published, circulated, reproduced or distributed and/or re‐distributed in whole or in part by any recipient of this report to any other person without the prior wri en consent of KGI Fraser. This report is not intended for distribu on and/or redistribu on, publica on to or use by any person in any jurisdic on outside Singapore or any other jurisdic on as KGI Fraser may determine in its absolute discre on, where the distribu on, publica on or use of this report would be contrary to applicable law or would subject KGI Fraser and its connected persons (as defined in the Financial Advisers Act, Chapter 110 of Singapore) to any registra on, licensing or other requirements within such jurisdic on. The informa on or views in the report (“Informa on”) has been obtained or derived from sources believed by KGI Fraser to be reliable. However, KGI Fraser makes no representa on as to the accuracy or completeness of such sources or the Informa on and KGI Fraser accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the Informa on. KGI Fraser and its connected persons may have issued other reports expressing views different from the Informa on and all views expressed in all reports of KGI Fraser and its connected persons are subject to change without no ce. KGI Fraser reserves the right to act upon or use the Informa on at any me, including before its publica on herein. Except as otherwise indicated below, (1) KGI Fraser, its connected persons and its officers, employees and representa ves may, to the extent permi ed by law, transact with, perform or provide broking, underwri ng, corporate finance‐related or other services for or solicit business from, the subject corpora on(s) referred to in this report; (2) KGI Fraser, its connected persons and its officers, employees and representa ves may also, to the extent permi ed by law, transact with, perform or provide broking or other services for or solicit busi‐ness from, other persons in respect of dealings in the securi es referred to in this report or other investments related thereto; and (3) the officers, employees and representa ves of KGI Fraser may also serve on the board of directors or in trustee posi ons with the subject corpora on(s) referred to in this report. (All of the forego‐ing is herea er referred to as the “Subject Business”.) However, as of the date of this report, neither KGI Fraser nor its representa ve(s) who produced this report (each a “research analyst”), has any proprietary posi on or material interest in, and KGI Fraser does not make any market in, the securi es which are recommended in this report. Each research analyst of KGI Fraser who produced this report hereby cer fies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject corpora on(s) and securi es in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of KGI Fraser or any other person, any of the Subject Business involving any of the subject corpora on(s) or securi es referred to in this report; and (4) he/she has not received and will not re‐ceive any compensa on that is directly or indirectly related or linked to the recommenda ons or views ex‐pressed in this report or to any sales, trading, dealing or corporate finance advisory services or transac on in respect of the securi es in this report. However, the compensa on received by each such research analyst is based upon various factors, including KGI Fraser’s total revenues, a por on of which are generated from KGI Fraser’s business of dealing in securi es. Copyright 2015. KGI Fraser Securi es Pte. Ltd. All rights reserved.

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