Still cheap in the face of adversity

DESPITE LOWERING their full-year earnings forecasts, 2 brokers maintained their ratings on Techcomp last week.

The leading Chinese maker of proprietary lab test equipment reported a year-on-year slide of 16.8% in 1H08 net earnings to US$815,000 last Thursday.

Sales grew 24% to US$31.7 million, largely due to growth in the PRC and other Asian markets.

First half is seasonally weak as customers of equipment manufactured by Techcomp are mainly government institutions which purchase lab test equipment toward year end.

Thus, distribution of equipment from principals such as Hitachi comprised a major part of first half sales each year.

Costs of goods in 1H08 rose more than sales due to the appreciation of the Japanese Yen and the RMB against the USD, resulting in margin erosion.

Nevertheless, SBI-E2 and CIMB-GK are still positive on Techcomp for the following reasons:

1) Expansion of its manufacturing segment

FY08-10 earnings estimates were revised downward due to higher operating costs, but the brokers believe the margin squeeze will be offset by expansion of its manufacturing segment.

Based on FY07, some 83% of sales and 57% of profit before tax came from equipment distribution, while the remaining came from lab equipment manufacturing.

Techcomp’s strategy is to grow its manufacturing division, which is more than three times as lucrative as distribution, and also has more stable margins. (Profit before tax margins for manufacturing were 24.8% for FY07, compared to 6.6% for distribution.)

Second-half results seasonally surpass first-half's, says executive director Eric Chan. Photo by Sim Kih

2) Upside from impending joint ventures

Techcomp recently formed a joint venture with UK lab group, Bibby Scientific, to produce scientific equipment products under Bibby’s brands at Techcomp‘s facilities in China.

More of such JVs are underway, according to Techcomp’s executive director Eric Chan.  Several M&A deals are expected to materialize in the second half, he said at 1H08’s results briefing.

The company announced the acquisition of a Chinese lab test equipment maker this morning.

3) Rising demand for lab test equipment

Demand for Techcomp’s products is expected to benefit from rising safety standards in Asia and China.

Low valuations compared to regional peers

Based on last close price of 42 cents, Techcomp’s PE of 7.8X FY08 was very low compared to a regional sector average of 15.3 X, according to CIMB-GK estimates.

The broker maintained an outperform rating for Techcomp, but reduced price target to 56 cents in view of rising operating costs in China.

SBI-E2 maintained its buy call and also reduced price target, to 60 cents.

The broker revised its estimates downward as 1H08 earnings was only 11% of earlier full year estimates, versus a historical contribution of 15%.

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