Missed a beat in 1Q
The inventory adjustment was a ‘short-term pain’s trategy by BIG to strengthen its market leadership position in its key Chinese market.1QFY14 results may trigger an investor stampede to exit but valuations will become more palatable, as its long-term game plan is still intact.
1QFY14 core net profit of US$12m (-63% yoy) missed our and consensus estimates, forming 14% of our FY14 forecast. We cut our FY14-16 EPS estimates by 14-32% for lower sales assumptions and shave off 20% of our SOP-based target price. Our Outperform rating is retained as we expect 2Q-4Q to improve. The positive financial effects of the new product, better operations and M&A accretion catalysts are understated.
Although we predicted that FY14 consensus estimates would be adjusted downwards, the 1QFY14 results still surprised us. The miss was primarily attributed to the revenue decline of 11% yoy from: 1) a 7% drop in IVP sales (inventory drawdown in China), and 2) a 33% decline in licensing revenue due to competition in Japan, 3) higher operating expenditure for sales and marketing efforts, and 4) the effects of the higher funding costs for the MTN programme.
2Q-4Q to play catch-up
BIG’s voluntary inventory drawdown in its China sales channels in light of the imminent ASP price cut aims to create higher volume growth in the next few quarters. Management still guided for a 15% increase in FY14 revenue, fuelled by continued double-digit product revenue growth in the EMEA and APAC regions. Specifically, it expects 2Q-4Q DES sales in China to improve significantly following the inventory adjustment. However, we do not think that licencing and royalty income will improve much in 2Q-4Q.
Despite the 1QFY14 results underperformance, we still believe that BIG’s distinctively cheaper valuation and mid-term earnings outlook remain intact, which augur well for the group. We expect the initial sales/earnings uplift from the commercialisation of new products in FY15. The addition of Spectrum Dynamics will also boost earnings.
Publish date: 12/08/13