UOB Kay Hian (UOBKH) analysts have kept their “buy” call with a target price of 78 cents for Valuetronics BN2 , on the back of the group’s foray into the artificial intelligence (AI) industry with goals on further expansion in the near term.
On June 24, the original equipment manufacturing company announced a partnership with SinnetCloud Group, an experienced graphics processing unit (GPU) and AI solutions provider affiliated to Shenzhen-listed Beijing Sinnet Technology Co.
According to analysts John Cheong and Heidi Mo, Valuetronics will invest HK$7.7 million ($1.34 million) in cash for a 55% interest in the joint venture Trio AI, to provide GPU and AI related value added cloud services.
The company will then acquire the GPU-enabled servers and ancillary hardware required for the JV and lease them back to Trio AI for a term of 60 months at a rent calculated to principally cover the preliminary equipment acquisition cost not exceeding HK$60 million.
Valuetronics expects to fully deploy the targeted investments in the next few months and will invest more money if there is good demand, according to the analysts. “We understand that SinnetCloud Group has already started pre-selling the GPU and AI related value-added cloud services even before the formation of this joint venture. It is targeting Hong Kong-based customers including start-up, fintech, health tech and media tech,” they add.
Cheong and Mo note that there is limited competition in the GPU and AI-related value-added cloud services business in Hong Kong due to Western sanctions on the GPU being sold to the Hong Kong China market.
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Demand for these services is also good due to the limited ability by the smaller start-ups to access costly GPU infrastructure, data rationalisation and development of large language models, they add.
Valuetronics will also be sourcing for GPUs locally by leveraging on the strong network of the joint venture, which will be cheaper than the GPUs from overseas markets.
The analysts expect share buyback and attractive dividend payout to continue, which serve as indicators of positive future performance. Valuetronics bought back 593,100 shares on June 25 after the announcement of the joint venture, which the analysts say is a positive signal on its prospects.
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“Also, to recap, for FY2024, Valuetronics proposed a final dividend of 9 Hong Kong cents/share and a special dividend of 8 Hong Kong cents/share. This brings the total dividend to 25 Hong Kong cents/share, translating to an attractive 64.6% payout ratio and 6.7% yield,” they note.
Besides the joint venture presenting an opportunity for Valuetronics to enter the AI industry, Cheong and Mo note that the company has a positive outlook from its first full year contributions from new customers.
The group has successfully diversified its customer base, with new customers like a Canada-based ICE customer providing network access solutions and a CE customer supplying electronic products to a leading global entertainment conglomerate.
These new customers have contributed in 2HFY2024 and will make their first full-year contributions in FY2025, they say. With their high growth potential and more favourable margins, the analysts expect Valuetronics to reap earnings growth in FY2025.
Finally, Cheong and Mo say that Valuetronics’ newly constructed Vietnam campus strategically positions it to meet changing customer needs.
Valuetronics has a strong cash balance of HK$1.1 billion that is equivalent to around 80% of its market cap, and is currently reading at only 2 times FY2024 ex-cash P/E, which offers an attractive FY2025 dividend yield of around 7%, say the analysts.
The analysts keep their “buy” call with a PE-based target price of 78 cents, pegged to 10.8 times P/E for FY2025. This is based on 1 standard deviation above Valuetronics’ historical P/E mean to account for potential strong demand from its four new customers, they say.
As at 4.07pm, shares in Valuetronics are trading flat at 63.5 cents.
