Valuetronics shoves further losses

Management decided to cease its loss-making Licensing business.

OCBC Investment Research noted:

Valuetronics Holdings Limited reported 1QFY13 revenue of HK$634.5m, which represented a 20.4% YoY jump and was within our expectations. However, PATMI dipped 18.7% YoY to HK$25.7m and missed our estimates due to lower-than-expected gross margin. Topline and bottomline formed 23.8% and 18.8% of our full-year estimates, respectively.

VHL reclassified its three business segments into Consumer Electronics, Industrial and Commercial Electronics and Licensing this quarter, given the blurring differences between its previous OEM and ODM segments. Strong YoY revenue growth of 36.9% in the CE segment was partially offset by weakness from its ICE (-9.0%) and Licensing (-50.4%) segments.

What surprised us was management’s decision to cease its Licensing business given significant challenges ahead from a tepid US economy and intense competition which resulted in a shrinkage in its market penetration. We had previously estimated this segment to achieve breakeven in FY14.

VHL expects to incur total termination expenditure of HK$28m, which would be booked in 2QFY13. Management believes that it would likely incur heavier losses in FY13 if it continues the Licensing operations given significant advertising and promotion subsidies to retailers.