ELEC AND ELTEK (Lim&Tan)

S$3.56 - ELEC.SI

• Even excluding the one-off US$5mln dual listing charge, 2Q2011 bottom-line would have still declined 29% yoy to US$17mln (-50% yoy if included), deteriorating from 1Q2011’s 12% yoy decline. This is despite top line having grown 7.6% yoy to US$168mln.

• The weaker bottom-line performance reflects higher raw material, labor and SG&A costs reflecting the inflationary environment in China. Other factor include the continued strength of the RMB and higher finance costs.

• Looking ahead, notwithstanding the uncertain macro environment caused by the debt problems in the US and Europe, management said that their overall order in-take is showing modest growth as they enter the seasonally stronger 3Q2011. However, management warned that there continues to be many challenges ahead.

• With 1H2011 net profit of US$28mln only accounting for 33% of full year consensus estimate (versus 51% last year), we believe there is likely to be downside risks.

• Notwithstanding this, there is likely to be near term support for the share price as despite the lower profit (-34% yoy if we include the dual listing expense and -22% if we exclude it), the company maintained its interim dividend of US$0.15 a share, representing a payout ratio of 100% versus 66% last year.

• Since the stock started its dual listing in Hong Kong on 8 July 2011, its share price in Hong Kong has been on a consistent decline from high of HK$32.3 to yesterday’s close of HK$28.3, which is equivalent to US$3.63.

• In Singapore, the stock has similarly been on a consistent downtrend since its dual listing started in Hong Kong, having declined from US$4 to yesterday’s close of US$3.56.

• Our last call in early July’11 ahead of its dual listing in Hong Kong was to “Take Profit” anywhere close to the US$4 level as all previous dual listing candidates in Hong Kong have seen their share prices declined shortly after their dual listings there.

• With the stock having declined 11% since then, we believe it will likely be held up in the near term by its interim dividend. We are thus changing to Neutral now.