NEUTRAL Downgraded
US$3.56 Target: US$3.60
Mkt.Cap: US$668m/US$668m
• Below; cutting forecasts and downgrade to NEUTRAL from Outperform. Excluding one-off US$5m expenses for its dual-listing in 2Q11, 2Q11 core net profit of US$17.1m (-29% yoy) is 24% below our estimate due to lower-than-expected GP margins. 1H11 core net profit of US$32.6m (-23% yoy) forms 40% of our forecast. We have cut our FY11-13 profit forecasts by 9-22% to factor in lower GP margin assumptions. Accordingly, our target price drops from US$4.03 to US$3.60, still based on 8x CY12 P/E. We downgrade the stock to NEUTRAL as its share price has done well, outperforming the market by about 20% (including a 25 USct final dividend) YTD. We see support from its sustainable attractive dividend yields.
• Revenue inched up 8% yoy to US$168m in 2Q11, on the back of higher HDI board sales and a better sales mix that lifted weighted ASPs. HDI sales formed 13.9% of sales in 2Q11 vs. 8.1% a year ago. Sales of 2-6 layers and eight layers & above made up 61.5% (67.1% in 2Q10) and 24.6% (24.7%) of the total, respectively.
• EBITDA margins contracted 6.8% pts yoy to 17.8% in 2Q11, dragged down by a 5.8%-pt decline in GP margins. The drop was precipitated by higher raw-material and wage costs. Together with one-off expenses relating to its dual listing in Hong Kong, net profit plunged 50% yoy to US$12.0m.
• Net gearing still low at 0.16x (0.04x at end-March); interim dividend intact. E&E still generated about US$5m of positive free cash flow in 2Q11. Net gearing increased due largely to the final dividend paid during the quarter. It declared an unchanged interim dividend of 15 UScts.
• More subdued seasonal uptick in 2H11. We understand that order intake remained healthy at the beginning of 3Q, especially for HDI boards where E&E is still operating at full capacity. Thus, E&E will continue invest in more HDI capacity. Its new plant in Yangzhou is on track for completion by year-end. In the near term, we expect more subdued hoh growth in 2H11 on the back of a slow economic recovery in the US and European markets.
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