Buy
Turning around PCB assembly lines total solution provider Sun East designs and manufactures its own screen printing, soldering and cleaning machines. The group is now the largest global distributor of Samsung SMT machines for 7 years. It offers full range of services that few manufacturers offer. Lead-free soldering machines Sun East is the largest soldering machine manufacturer in China. It is also the only manufacturer that possesses the necessary technology to produce lead-free soldering machines. Global trend in electronics production is going lead-free. Moreover, the group is competitive in price, thus lead-free soldering machines are expected to be one of the future growth drivers. Rapid growth in electronics sector in China Industry output of electronic and information enterprises in China in 2002 grew 21%. MII forecasts 2003 growth to be 17%. Shift of production base into China by foreign firms will continue to contribute to the growth. Undemanding valuation The group has disposed of the loss-making consumer products and sub-contracting services. We expect the group to return into black with a $32.5M net profit this year. Based on our estimation, it is trading at 12.9x and 7.5x PER for FY04 and FY05, respectively. Valuation is undemanding. We believe it should be valued at 11x FY05 PER, which is equivalent to $1.76.
Source: Sun
East Technology, Tung Tai estimates Company background Established in 1984, Sun East Technology has been principally engaged in design, manufacture and sale of soldering machines and automatic production lines in Hong Kong and China. In 1997, Sun East began to involve in the distribution of SMT (Surface Mounting Technology) machines supplied by Samsung. Together with its PCB printing, soldering and cleaning machines, Sun East offers a full range of PCB manufacturing equipment. With its reputation and track record, the group has recently secured distribution rights of Siemens SMT machines. Sun East Technology has workshops both in Shenzhen and Shanghai, with total area of 76,300 sq.m.. It has strong design capability as it has over 300 engineers and technicians. It is the largest soldering machine manufacturer and the largest SMT service provider in the PRC. It has 21% market share in the China market for soldering machines. In FY03, production lines and brand name production equipment accounted for 57.5% and 14.7% of the group’s turnover, respectively. Consumer products and sub-contracting services accounted for 23.9% and 3.9% of turnover. However, because consumer products and sub-contracting services incurred losses, the group disposed of the subsidiary, Pro-Tech Industries Corp., in March 2003. Competitive strengths Strong customer base Sun East has a well established customer
base, with a lot of customers being renowned brand names Sun East has 19 years of experience in manufacturing soldering
machines and production lines. It has established a strong and diversified
customer base with over 2500 customers. Most customers of the group are
renowned brands such as Emerson, Philips, Sony, Skyworth and TCL. The group has
maintained over 10 years’ relationship with some of its customers. The largest
customer only accounts for approximately 3% of turnover. The five largest
customers account for less than 10% of turnover. A broad customer base enables
the group to have more stable income. Reliance on a small number of customers
can be avoided. PCB assembly lines total solution providerTogether with distributing SMT machines,
Sun East provides full range PCB assembly lines Sun East designs and manufactures its own soldering machines and
cleaning machines. Together with Samsung’s SMT machines, Sun East is able to
provide full range PCB assembly lines from printing, SMT, soldering to
cleaning. It has been one of the major distributors of Samsung for seven years.
Sun East has recently secured distribution rights of high-end SMT machines of
Siemens. The group’s target is to achieve $200-300M sales. The group’s market
share in SMT machines is expected to grow. Compared with its peers in the
industry, the group offers better services. Future growth drivers Lead-free soldering machinesLead-free soldering machines of the group
is price competitive Having 30% market share, Sun East ranks no. 1 in soldering machine market in the PRC. At present, soldering machines account for 34% of total turnover. In 1999, Sun East started research on lead-free technology. In 2002, it introduced lead-free soldering system, reflow and other series products. Lead-free soldering machine costs about $180,000 per unit, 20% higher than soldering machine. However, it is still 30% lower than its Japanese competitor and profit margin can reach 35%. Since cost is a major concern for most component makers, Sun East is more competitive than its Japanese competitors. Current customers include Samsung, Pioneer, JVC and Sony. Annual capacity for lead-free soldering machines can reach 1500 units by next year. Global trend in electronics production is
going to be lead-free. At present, Sun East is the only lead-free soldering
machines producer in China Soldering is widely used in electrical appliance manufacturing.
However, soldering material with lead in content is hazardous to health. It was
banned to be used in Japan in 2003 and will also be completely banned in Europe
in January 2004. In China, soldering with lead may be banned by 2006. By that
time, old soldering machines may have to be replaced. Moreover, if brands want
to maintain their market share in Europe and Japan, they must have lead-free
parts. EMS companies in China have to be more involved in lead-free
manufacturing. Demand for lead-free soldering machines may surge. At present,
Sun East is the only company that manufactures lead-free soldering machines in
China. Though there will be competition from foreign manufacturers, Sun East is
well established in China market and has the first mover advantage. China continues to be the world factory Outsourcing to China will continue. Fast
growth in electronics sector in China is expected to sustain Low labour costs in China remain to be attractive to foreign capital. According to industry sources, international brand names such as Nokia and Motorola have 60% and 70% of their handsets made in China. Electronics is one of the sectors that undergoes fast growth. According to Ministry of Information Industry, the industry output of electronic and information enterprises reached RMB1.78 trillion in 2002, up 21% yoy. The authority forecasts sales of China’s electronic products to grow 17% to US$198B in 2003. In 1996, China produced just 2.61% of electronic goods in global market. By 2002, the percentage surged to 15.1%. Export value of electronics products in 2002 reached US$92.04B, accounting for 28.3% of China’s total exports. For semiconductor, the market in China is expected to reach US$28B this year, up 23.4% yoy. It is expected to grow at a 18.6% CAGR from US$23B in 2002 to $54B in 2007. The trend of shifting production base to China will continue, as multinationals are increasingly cost conscious. As a result, there will be sustainable demand for Sun East’s products. Fabrication businessOrders on fabrication are expected to have
stable growth Sun East has been doing sheet metal fabrication business, which has wide application including telecommunication, electronic power, computer, commercial stereo appliances, etc. Emerson, an existing production lines customer of the group, has recently acquired Huawei, which is engaged in power supply. The group received orders from Emerson and is expected to grow continuously in the next three years. Moreover, the group formed a JV, Sun East Sanki, in which it has 50% interest with Sanki Trading Co Ltd. With a factory located in Shenzhen, the JV will be principally engaged in automobile production line and automobile production facilities business, mainly serves Japanese automobile manufacturer. Conclusion The group did a 38M-share placement at $0.61 per share in October 2003. Net proceeds raised was about $22.5M in which $10M would be used for expanding capacity and the remaining balance as working capital. As at 31 March 2003, gearing (long term debt over equity) of the group was 11%. We expect gearing after share placement to drop slightly to 9.8%. Cash on hand is about $70M. The group’s sales orders were affected by SARS, but were able to rebound afterwards. According to management, orders in 1H03 rose 20% yoy. We expect full-year turnover to be $478M, represents a drop from $502M in FY03, but striping out the discontinued operations, it is expected to be up 32%. The group is expected to return into black, with net profit of $32.5M. The stock is trading at 12.9x and 7.5x PER for FY04 and FY05, respectively. Valuation is undemanding given its growth potential. It should be valued at 11x FY05 PER, which is equivalent to $1.76. Consolidated Profit and Loss Account
Source: Sun East Technology, Tung Tai estimates Consolidated Cash Flow Statement
Source: Sun East Technology Consolidated Balance Sheet
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