Hong Kong Results Review 1H17 results announced on 16 Aug were in line

18 August 2017 Industrial | Misc. Manufacturer Buy (Maintained) Techtronic Industries Target Price: HKD46.00 Price: HKD38.60 Tapping Into a New Huge Potential Market Cap: USD9,037m Bloomberg Ticker: 669 HK

We expect TTI would continue to ride on the tailwind of the steadily Share Data growing US housing market, to deliver solid results. In addition, its Avg Daily Turnover (HKD/USD) 120m/14.7m expansion into new segments such as non-residential and storage could 52-wk Price low/high (HKD) 25.6 - 38.6 provide a new huge potential and be supportive for its growth in the mid- to-longer-term. We maintain BUY with a higher DCF-derived TP of Free Float (%) 64 HKD46.00 (from HKD37.00, 19% upside). Shares outstanding (m) 1,822 Estimated Return 19% Benefitting from a stable and growing US housing market given: i. Home Depot (HD US, NR) a major client of Techtronic Industries’ (TTI) tool Shareholders (%) segment, continues to deliver solid results. Home Depot’s recent results Mr. Pudwill Horst Julius 20.0 showed sales, SSSG and EPS beating consensus and it lifted its guidance JP Morgan Chase & Co 8.1 on these three indicators, showing its expectation for a solid 2H ahead; FMR LLC 8.0 ii. Joint Centre For Housing Studies of Harvard University’s (JCHS) leading

indicator of remodeling activity (LIRA) shows that home improvement Share Performance (%) spending growth in the US should stay healthy, at c.6% until 1H18; YTD 1m 3m 6m 12m Mid- to long-term: tapping a new and huge potential, as: Absolute 38.7 2.9 8.0 39.9 13.0 i. TTI has been launching new product lines and increasing its stock keeping Relative 14.1 (0.6) (0.4) 25.9 (7.2) units (SKU) for those lines, in order to expand its exposure beyond the Source: Bloomberg residential market. According to Constructconnect, as of FY16 the

construction spending in the non-residential segment was 50% larger than Techtronic Industries (669 HK) that in the residential segment and it is estimated to grow as fast at c.6% Price Close Relative to (RHS) pa in FY17-18F. Therefore, we estimate that in this segment is a lot of 39 103 untapped potential for TTI. 34 92 ii. TTI is going to launch storage products from 2H17F onwards. Based on 29 81 24 70 information from the industry and our own estimates, the market size for 35 storage is c.17-18% of that of power tools, thus more potential for TTI. 30 25 In conclusion, we expect TTI’s power equipment segment to be able to keep on 20 15 growing solidly, at a c.CAGR of 12% in FY16-19F. 10 5

Floor care and appliances segment: a short-term hiccup. We see that while Volm

16 17

17

17

16

16

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this segment’s coded products, which still contribute a large portion of -

Oct Apr

Jun

Feb

Dec Aug segmental revenue, are under pressure, its cordless segment kept on growing at 50% YoY in 1H17. Therefore, while recovery of this segment may not happen Source: Bloomberg near-term, we expect it to resume revenue growth from next year onwards. Gross profit margin (GPM) should continue growing driven by a better scale, new products launches, product mix improvement and efficiency gains. We expect TTI’s overall GPM to expand to 37.7% by FY19F, from 36.2% in FY16. Maintain BUY. Our new TP is based on the same DCF methodology and implies an 18.6x FY18F P/E multiple (vs 18.0x FY17F P/E previously), which is close to 1.5SD above its 3-year forward mean. The stock is currently trading at 15x FY18F P/E, vs 19x of the US-listed Stanley Black & Decker’s (SBD) (SWK US, NR) multiple. We think this is unjustified, as TTI enjoys a higher projected revenue and recurring earnings growth vs SBD.

Forecasts and Valuations Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover (USDm) 5,038 5,480 5,934 6,561 7,246 Reported net profit (USDm) 354 409 488 582 686 Recurring net profit (USDm) 354 409 488 582 686 Recurring net profit growth (%) 18.0 15.4 19.4 19.2 17.8 Recurring EPS (USD) 0.19 0.22 0.27 0.32 0.37 DPS (USD) 0.05 0.06 0.07 0.09 0.10 Recurring P/E (x) 25.5 22.1 18.5 15.5 13.2 P/B (x) 4.18 3.76 3.28 2.85 2.47 P/CF (x) 20.9 14.6 17.1 12.6 11.0 Dividend Yield (%) 1.0 1.3 1.5 1.8 2.1 Analyst EV/EBITDA (x) 12.8 11.2 9.3 7.8 6.4 Ken Chui, CFA Return on average equity (%) 17.2 18.0 19.0 19.7 20.1 Net debt to equity (%) 16.1 7.6 2.2 net cash net cash +852 2103 9415 Our vs consensus EPS (adjusted) (%) 2.2 5.2 16.9 [email protected]

Source: Company data, RHB

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Techtronic Industries Results Review

18 August 2017 Industrial | Misc. Manufacturer

Financial Exhibits

Financial model updated on : 2017-08-17. Asia Financial summary Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Hong Kong Recurring EPS (USD) 0.19 0.22 0.27 0.32 0.37 Industrial EPS (USD) 0.19 0.22 0.27 0.32 0.37 Techtronic Industries DPS (USD) 0.05 0.06 0.07 0.09 0.10 Bloomberg 669 HK BVPS (USD) 1.18 1.31 1.50 1.73 2.00 Buy Weighted avg adjusted shares (m) 1,830 1,830 1,832 1,833 1,833

Valuation basis Valuation metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F DCF valuation Recurring P/E (x) 25.5 22.1 18.5 15.5 13.2 P/E (x) 25.5 22.1 18.5 15.5 13.2 Key drivers P/B (x) 4.18 3.76 3.28 2.85 2.47 i. Power equipment continues to grow stably; FCF Yield (%) 3.0 4.7 3.4 5.2 5.8 ii. GPM expansion led by enhancement in Dividend Yield (%) 1.0 1.3 1.5 1.8 2.1 productivity. EV/EBITDA (x) 12.8 11.2 9.3 7.8 6.4 Key risks EV/EBIT (x) 18.4 15.9 13.2 10.8 8.9 i. Slower-than-expected recovery in floor care segment; Income statement (USDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F ii. Opex increases faster than reveune (due to Total turnover 5,038 5,480 5,934 6,561 7,246 SD&A and R&D to drive topline growth). Gross profit 1,798 1,985 2,185 2,448 2,734 EBITDA 565 635 741 867 1,007 Company Profile Depreciation and amortisation (170) (190) (215) (243) (276) TTI, is a leading manufacturer of power tools, outdoor Operating profit 395 445 527 624 731 power equipment and floor care products, with a 35%- Net interest (13) (10) (6) (3) 1 40% share in the global power tools market. It owns several reputable brands, including , Pre-tax profit 387 440 526 627 738 Milwaukee, AEG, Homelite, and . Its Taxation (33) (31) (37) (44) (52) major customers include large home improvement Minority interests 0 0 0 0 0 retailers such as Home Depot, Walmart, Bunnings and Recurring net profit 354 409 488 582 686 B&Q.

Valuation chart Cash flow (USDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Change in working capital (145) 4 (79) (130) (148) TTI’s 3-year forward P/E band Cash flow from operations 432 618 529 719 820 Capex (162) (190) (220) (249) (296) Cash flow from investing activities (161) (186) (220) (249) (296) Proceeds from issue of shares 3 2 0 0 0 Dividends paid (92) (115) (137) (163) (192) Cash flow from financing activities 96 (237) (39) (92) (116) Cash at beginning of period 690 775 805 1,015 1,259 Net change in cash 368 195 271 377 408 Ending balance cash 1,058 970 1,075 1,392 1,667

Balance sheet (USDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total cash and equivalents 775 805 1,015 1,259 1,530 Tangible fixed assets 32 30 35 34 34 Intangible assets 1,075 1,100 1,111 1,122 1,133 Total investments 556 615 722 840 986 Total other assets 146 178 178 178 178 Total assets 4,803 5,120 5,551 6,196 6,923 Short-term debt 666 498 598 662 731 Total long-term debt 457 490 478 476 473 Other liabilities 112 122 155 171 188 Total liabilities 2,647 2,721 2,800 3,026 3,259 Shareholders' equity 2,156 2,400 2,751 3,170 3,664 Minority interests (0) (1) (0) (1) (1) Total equity 2,156 2,399 2,751 3,170 3,664 Net debt 348 183 61 (122) (326) Total liabilities & equity 4,803 5,120 5,551 6,196 6,923

Key metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Revenue growth (%) 6.0 8.8 8.3 10.6 10.4 Recurrent EPS growth (%) 18.0 15.4 19.3 19.1 17.8 Gross margin (%) 35.7 36.2 36.8 37.3 37.7 Operating EBITDA margin (%) 11.2 11.6 12.5 13.2 13.9 Net profit margin (%) 7.0 7.5 8.2 8.9 9.5 Dividend payout ratio (%) 26.1 28.0 28.0 28.0 28.0 Capex/sales (%) 3.2 3.5 3.7 3.8 4.1 Interest cover (x) 16.8 20.4 24.2 28.0 31.3

Source: Company data, RHB

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

1H17 results review

Figure 1: TTI’s 1H17 results summary FYE Dec (USDm) 2H15 1H16 2H16 1H17 FY17F 1H17 as a % FY17F 1H17 as a % 1H17 as a % 1H16 as a % of FY17F of FY17F of FY17F of FY16 BBG BBG (RHB-After (RHB-Before (RHB-After consensus consensus revision) revision) revision) Revenue Power Equipment 2,014 2,204 2,267 2,467 5,031 Floor Care and Appliances 550 481 529 415 903 Total 2,564 2,686 2,795 2,882 6,017 47.9% 5,934 47.7% 48.6% 49.0% YoY chg 2.4% 8.6% 9.0% 7.3% 8.3% COGS -1,648 -1,717 -1,717 -1,826 -3,749 Gross profit 916 969 1,016 1,056 2,211 47.7% 2,185 47.6% 48.3% 48.8% YoY chg 3.4% 9.9% 10.9% 7.3% 10.1% Gross margin 35.7% 36.1% 36.4% 36.6% 36.8% 36.8% SD&A -339 -399 -395 -430 -857 Administrative expenses -300 -299 -299 -318 -642 R&D expenses -62 -71 -76 -77 -159 SGA ratio -27.3% -28.7% -27.6% -28.7% -28.0% Operating profit 216 199 246 230 526 43.8% 527 43.5% 43.7% 44.8% YoY chg 15.2% 11.4% 14.0% 15.6% 18.3% Operating margin 8.4% 7.4% 8.8% 8.0% 8.9% Total non-operating income 8 6 14 6 21 Finance costs -10 -12 -10 -13 -22 PBT 214 193 247 223 526 Tax -18 -16 -15 -19 -37 MI 0 0 0 0 0 Net profit 196 177 232 204 474 43.2% 488 41.7% 41.9% 43.3% YoY chg 19.3% 11.6% 18.5% 15.5% 19.4% Net margin 7.6% 6.6% 8.3% 7.1% 8.2% Recurring net profit 196 177 232 204 478 42.7% 488 41.7% 41.9% 43.3% YoY chg 19.3% 11.6% 18.5% 15.5% 19.4% NPM - recurring 7.6% 6.6% 8.3% 7.1% 8.2% Source: Company data, Bloomberg, RHB

TTI announced its 1H17 results after the market close on 16 August: i. The recurring net profit (NP) grew by 15.5% YoY to USD204m, contributing 42% and 43% of our (before revision) and market expectation for FY17F (vs 1H16: 43%). We view this in line. ii. The revenue grew by 7.3% YoY to USD2,882m, contributing 48% and 48% of our (before revision) and market expectation for FY17F (vs 1H16: 49%). We view this in line. Segmental performance: Growth momentum for the power equipment stayed solid, up by 11.9% YoY (vs up by 12.5% YoY if we exclude the forex impact). Its core product – Milwaukee (professional power equipment) – maintained a strong growth, with revenue up by 20.1% after excluding the forex impact. Revenues for the floor care and appliances was down by 13.8% YoY (vs down by 12.1% YoY if we exclude the forex impact). The weakness was mainly due to this segment’s coded products, which still contribute a large portion of segmental revenue, and are under pressure. Besides, TTI also exited a non-strategic OEM shredder business in North America. However, its cordless segment, which leverages on TTI’s expertise in cordless, keeps on growing robustly, at 50% YoY in 1H17. iii. GPM expanded 0.5ppt YoY to 36.6%, mainly driven by new product launches, product mix improvement and efficiency gains. The opex to sales ratio was flat at 28.7%. iv. Interim DPS grew by 38.8% to USD3.57cents, implying a dividend payout ratio up to 32%, from 27% in 1H16.

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

FY17F Outlook Revenue growth of 8.3% YoY Expecting the power equipment segment to stay solid, and grow by 12.5% YoY, supported by a favourable macro environment in the US. Expecting the floor care segment to stay weak, down by by 10.6% YoY, given the pressure at its coded products; the contribution of the cordless products would remain small. GPM to grow by 0.6ppt YoY to 36.8% This increase would be driven by better scale, new product launches, product mix improvement and efficiency gains. We also expect the opex-to-sales ratio to decline by 0.1ppt to 28.0%, driven by better scale. As a result, we expect the recurring NP to grow by 19.4% YoY.

Benefitted From a Growing US Housing Market Home Depot continues to beat expectation Home Depot (HD US, NR), a major client of Techtronic's tool segment recently announced its 2Q17 (May-Jul) results, with sales (+6.2% YoY), SSSG/US SSSG (+6.3%/+6.6%) and EPS (+14.1% YoY) all beating consensus estimates. Given the solid performance during 1H17, Home Depot lifted its FY17F sales and SSSG guidance to +5.3%/+5.5% (from +4.6%/ +4.6% previously). We believe that the strong momentum at Home Depot bodes well for Techtronic’s 2H17 results and beyond.

Figure 2: Home Depot’s 2Q17 (May-Jul) results Actual figures Bloomberg consensus Sales USD28.1bn (+6.2% YoY) USD27.8bn SSSG +6.3% +4.9% US SSSG +6.6% / EPS USD2.26 (+14.1% YoY) USD2.21 Source: Company data, Bloomberg

Figure 3: Home Depot’s FY17 guidance Guidance Compared to previous Sales +5.3% Up from +4.6% SSSG +5.5% Up from +4.6% EPS USD7.29 Up from USD7.15 Source: Company data, Bloomberg

Our view: Raising the FY17F guidance, implies that Home Depot’s growth momentum should stay strong in the coming quarters. Macros remain favourable. During the analyst briefing, Home Depot’s management mentioned that: i. Macros remain favourable. Some housing market data like housing price and new home sales kept on showing a healthy momentum in recent months. An improving labour market should also be supportive for growth of the housing market; ii. Despite the hike in housing price, according to the National Association of Realtors, the housing affordability index (the higher the index, the more affordable the housing) reached 153 in May 2017, above the level of 148 of the past 20 year average; iii. Management further elaborated on the point of an aging housing in the US, pointing out that 51% of the housing in US is over 40 years old while 65% of the housing in the US is over 30 years old, which should require more maintenance going forward. Boding well for TTI’s performance in coming quarters. During the analyst briefing, Home Depot’s management also mentioned that its tool category kept on growing above the company’s average performance in 2Q17. We see that trend would stay in the coming quarters.

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

On the other hand, Home Depot’s management also talked about the threat coming from Amazon (AMZN US, NR), a dominant e-commerce player in the US. (SHLD US, NR), a major retailer in the US, announced a cooperation with Amazon in late-July, to sell its Kenmore brand home appliances on Amazon’s platform. The market was thus concerned that such a cooperation might be a beginning and many others would follow. That could turn out to be a threat to Home Depot. Home Depot’s management illustrated a few points: i. It keeps on gaining market share in recent quarters, showcasing its comparative advantage to its peers; ii. Its broad retail network does play an important and meaningful role for its online business. Approximately 43% of its pickups for the online transactions happen at its stores; iii. Home Depot is also capable of delivering products ordered online to its clients within a window of 2-4 hours. Therefore, in the near-term, we do not see a threat to Home Depot’s business. In the longer-term, even if Home Depot would be impacted, we also thing that TTI should be less affected given that it is a known brand name. During the analyst briefing, TTI’s management also pointed out that Home Depot’s online platform has been actually doing quite well (revenue +23% YoY in 2Q17). Besides, they stated that for the power equipment segment, especially for the professional sub segment, clients still prefer purchasing the items in-store.

Figure 4: S&P CoreLogic Case-Shiller 20-City Composite Figure 5: US Housing starts (k units) City Home Price NSA Index, YoY (%)

7 1400

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5 1000

4 800

3 600

2 400

200 1

0 0

Source: S&P/ Case-Shiller Source: US Census Bureau

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

Figure 6: US new home sales (k units) Figure 7: US existing home sales (m units)

700 5.8

600 5.6 5.4 500 5.2 400 5 300 4.8 200 4.6

100 4.4

0 4.2

Source: US Census Bureau Source: National Association of Realtors

Figure 8: US unemployment rate (%) Figure 9: US housing affordability index

6 250

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0

30/9/1997 30/9/1998 30/9/2000 30/9/2001 30/9/2003 30/9/2004 30/9/2005 30/9/2006 30/9/2007 30/9/2008 30/9/2009 30/9/2010 30/9/2012 30/9/2013 30/9/2015 30/9/2016 30/9/2002 30/9/2011 30/9/2014 US Unemployment Rate (%) 30/9/1999

Source: US Labor Depratment Source: National Association of Realtors

US remodelling activity expected to stay solid The Joint Centre For Housing Studies of Harvard University’s (JCHS) leading indicator of remodelling activity (LIRA) also indicates that home improvement spending growth in the US should stay healthy, at c.6% untill 1H18.

Figure 10: Leading indicator of remodelling activity

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

Source: Joint Centre For Housing Studies of Harvard University

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

Tapping New Potential Going Forward i. Expanding beyond the residential market TTI has been launching new product lines and increasing the SKUs for those lines to expand its exposure beyond the residential market through products such as the impact wrench (for infrastructure) or the plumbing snake drain (for plumbing), etc.

Figure 11: Milwaukee’s impact wrench Figure 12: Milwaukee’s Airsnake Drain

Source: RHB Source: RHB

According to Constructconnect, an individual research institution on the US market, construction spending in the non-residential segment is actually 50% larger than that in the residential segment, at USD~690bn as of FY16 and is growing as fast as the latter (c.6% pa in FY17-18F). Therefore, we see that there is still a lot of untapped potential in non-residential segment for TTI.

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

Figure 13: US construction spending in residential/non-residential segments (USDbn)

900

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0 2014 2015 2016 2017F 2018F

Residential Non-residential

Source: Constructconnect ii. Entering a new product segment, beyond tools In addition, TTI is going to launch storage products from 2H17F onwards. Based on information from TTI’s peers and our own estimates, the market share for storage is c.17%-18% of that of power tools, which also provides plenty of untapped potential.

Figure 14: Milwaukee’s storage products Figure 15: Milwaukee’s additional storage products

Source: RHB Source: RHB

Therefore, we expect that TTI’s power equipment segment should be able to keep on growing solidly, at a c.CAGR of 12% in FY16-19F.

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

Floor care and appliances segment: a short-term hiccup We see that while this segment’s coded products, which still contributes a large portion of segmental revenue, are under pressure, its cordless segment, which leverages on TTI’s expertise in cordless, keeps on growing robustly, at 50% YoY in 1H17. Therefore, while we see that recovery of this segment is not likely to happen in the near-term, we expect that it should resume revenue growth from next year onwards.

GPM: Should keep on growing This growth would be driven by better scale, new product launches, product mix improvement and efficiency gains. Therefore, we expect TTI’s overall GPM to expand to c.37.7% by FY19F, from 36.2% in FY16. We also expect the opex-to-sales ratio to decline to 27.7% by FY19F, from 28.1% in FY16. As a result, we expect the recurring NP to grow at a c.CAGR of 18.8% YoY in FY16-19F.

Figure 16: Changes to our earnings forecasts FY end Dec 31 (USDm) FY17F FY18F FY19F New Old Chg New Old Chg New Old Chg Revenue Power Equipment 5,031 5,010 0% 5,640 5,597 1% 6,303 6,236 1% Floor Care and Appliances 903 1,035 -13% 920 1,060 -13% 942 1,085 -13% Total revenue 5,934 6,045 -2% 6,561 6,657 -1% 7,246 7,321 -1% YoY chg 8.3% 10.3% 10.6% 10.1% 19.9% 21.1% COGS -3,749 -3,826 -4,113 -4,181 -4,512 -4,566 Gross profit 2,185 2,219 -2% 2,448 2,475 -1% 2,734 2,754 -1% YoY chg 10.1% 11.8% 12.0% 11.6% 23.2% 24.2% Gross margin 36.8% 36.7% 37.3% 37.2% 37.7% 37.6% SD&A -857 -873 -2% -944 -958 -1% -1,039 -1,050 -1% Administrative expenses -642 -654 -2% -703 -714 -1% -770 -778 -1% R&D expenses -159 -162 -2% -176 -179 -1% -195 -197 -1% Total opex % of revenue -28.0% -28.0% -27.8% -27.8% -27.7% -27.7% Operating profit 527 529 0% 624 625 0% 731 730 0% YoY chg 18.3% 18.8% 18.4% 18.1% 38.1% 38.0% Operating margin 8.9% 8.8% 9.5% 9.4% 10.1% 10.0% Total non-operating income 21 21 25 25 31 31 Finance costs -22 -22 -22 -23 -23 -24 PBT 526 528 0% 627 627 0% 738 737 0% Income tax -37 -37 -44 -45 -52 -52 Effective tax rate -7.1% -7.1% -7.1% -7.1% -7.1% -7.1% MI 0 0 0 0 0 0 Net profit 488 491 0% 582 583 0% 686 685 0% Recurring net profit 488 491 0% 582 583 0% 686 685 0% YoY chg 19.4% 20.0% 19.2% 18.8% 39.7% 39.6% NPM - recurring 8.2% 8.1% 8.9% 8.8% 9.5% 9.4% Source: RHB

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

Figure 17: Detailed P&L FYE Dec (USDm) FY15 FY16 FY17F FY18F FY19F Revenue Power Equipment 3,972 4,471 5,031 5,640 6,303 Floor Care and Appliances 1,066 1,010 903 920 942 Total revenue 5,038 5,480 5,934 6,561 7,246 YoY chg 6.0% 8.8% 8.3% 10.6% 10.4% COGS -3,240 -3,495 -3,749 -4,113 -4,512 Gross profit 1,798 1,985 2,185 2,448 2,734 YoY chg 7.4% 10.4% 10.1% 12.0% 11.7% Gross margin 35.7% 36.2% 36.8% 37.3% 37.7% SD&A -698 -794 -857 -944 -1039 Administrative expenses -578 -598 -642 -703 -770 R&D expenses -128 -147 -159 -176 -195 Total opex % of revenue -27.9% -28.1% -28.0% -27.8% -27.7% Operating profit 395 445 527 624 731 YoY chg 13.8% 12.8% 18.3% 18.4% 17.2% Operating margin 7.8% 8.1% 8.9% 9.5% 10.1% Other income 5 5 5 6 7 Interest Income 11 12 15 19 24 Finance costs -23 -22 -22 -22 -23 PBT 387 440 526 627 738 Income tax -33 -31 -37 -44 -52 Effective tax rate -8.5% -7.1% -7.1% -7.1% -7.1% MI 0 0 0 0 0 Net profit 354 409 488 582 686 Recurring net profit 354 409 488 582 686 YoY chg 18.0% 15.4% 19.4% 19.2% 17.8% NPM - recurring 7.0% 7.5% 8.2% 8.9% 9.5% Source: RHB

Figure 18: Key assumptions FY15 FY16 FY17F FY18F FY19F Segment revenue growth Power Equipment 11.8% 12.6% 12.5% 12.1% 11.8% Floor Care and Appliances -11.2% -5.3% -10.6% 2.0% 2.4% Total revenue 6.0% 8.8% 8.3% 10.6% 10.4%

% of total revenue Power Equipment 79% 82% 85% 86% 87% Floor Care and Appliances 21% 18% 15% 14% 13% Total revenue 100% 100% 100% 100% 100%

Gross margin (RHB estimates) Power Equipment 37.0% 37.4% 37.9% 38.3% 38.7% Floor Care and Appliances 30.6% 30.8% 31.0% 31.2% 31.4% Blended 35.7% 36.2% 36.8% 37.3% 37.7% Source: RHB

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Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

Figure 19: DCF valuation FYE Dec (USDm) FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F EBIT 624 731 819 904 983 1,053 1,111 1,153 1,178 1,184 EBIT x (1-tax) 579 679 761 840 913 978 1,032 1,071 1,094 1,100 Depreciation 243 276 309 342 372 398 420 436 445 447 Capex (249) (296) (332) (366) (398) (427) (450) (467) (477) (480) ∆WC (131) (146) (164) (181) (197) (211) (222) (231) (236) (237) FCFF 442 513 574 634 690 739 779 809 826 830 Discount factor 0.930 0.865 0.804 0.748 0.695 0.646 0.601 0.559 0.520 0.483 Discounted FCF 411 443 462 474 480 478 468 452 430 401 Total discounted FCF 4,499 WACC 7.5% Terminal growth rate 1.0% Terminal value 6,197 Enterprise value 10,697 Net cash (101) Minority interest (0.5) Equity value (CNY) 10,797 Equity value (HKD) 84,218 Outstanding shares 1,830 Equity value/ share (HKD) 46.0 Source: RHB

Figure 20: Peer comparison 1 Company Ticker Price Mkt cap 3-mth PER PER PER EPS EPS 3-Yr PEG (x) Div yld Div yld P/B Hist P/B FY1 (US$m) avg t/o Hist (x) FY1 (x) FY2 (x) FY1 FY2 EPS Hist (%) FY1 (%) (x) (x) (US$m) YoY% YoY% Cagr (%) Techtronic Ind 669 HK 38.55 9,036 14.8 22.2 18.6 15.6 19.3 19.2 18.7 1.0 1.3 1.5 3.8 3.3

Stanley Black & SWK US 140.66 21,542 140.2 21.6 19.3 17.3 12.0 11.5 11.4 1.7 1.6 1.7 3.1 2.9 Snap-On Inc SNA US 151.52 8,725 114.7 16.5 14.9 13.5 10.3 10.9 9.0 1.7 1.9 2.0 3.1 2.8 Corp 6586 JP 4,305.00 10,941 19.4 22.7 20.9 19.4 8.4 7.9 10.4 2.0 1.4 1.5 2.2 2.0 Koki Co 6581 JP 867.00 798 1.1 18.0 N/A N/A N/A N/A N/A #VALUE! N/A N/A N/A N/A Bosch Ltd BOS IN Equity22,037.95 10,486 6.7 39.0 36.1 N/A 8.1 N/A N/A #VALUE! 0.6 0.7 6.3 5.6 23.5 22.8 16.7 9.7 10.1 10.3 #VALUE! 1.4 1.4 3.6 3.3 Priced at 17/08/2017 Source: RHB

Figure 21: Peer comparison 2 Company Rev Hist Rev FY1 NP Hist NP FY1 Net Net Unlev Gross Net Net ROE Hist ROE FY1 Sh px Sh px (US$m) (US$m) (US$m) (US$m) gearing gearing beta margin margin margin (%) (%) 1-mth % 3-mth % Hist (%) FY1 (%) Hist (%) Hist (%) FY1 (%) Techtronic Ind 5,480 5,934 409 488 8.3 2.9 0.19 36.2 7.5 8.2 17.0 17.8 2.9 8.0

Stanley Black & 11,407 12,376 965 1,163 42.3 41.4 0.8 37.4 8.5 9.4 18.4 15.3 (4.1) 4.6 Snap-On Inc 3,712 3,646 546 600 35.4 N/A 1.0 51.4 14.7 16.5 21.1 21.7 (4.7) (7.7) Makita Corp 3,767 3,989 406 467 0.0 0.0 0.8 35.5 10.8 11.7 9.4 10.0 (1.4) 2.7 Hitachi Koki Co 1,622 N/A 37 N/A 115.2 N/A 0.6 34.9 2.3 N/A 5.0 N/A (0.1) 0.1 Bosch Ltd 1,586 1,927 271 276 0.0 N/A 1.1 N/A 17.1 14.3 19.0 16.1 (10.4) (8.9) 4,419 5,484 445 627 38.6 20.7 0.87 39.8 10.7 13.0 14.6 15.8 (4.1) (1.8) Priced at 17/08/2017 Source: RHB

See important disclosures at the end of this report 11

Techtronic Industries Hong Kong Results Review

18 August 2017 Industrial | Misc. Manufacturer

SWOT Analysis

 Strong pipeline of innovative and disruptive products  A slowdown in to gain further market share the US housing market may affect demand for its DIY tools  Competition from major competitors in the high-end market (such as  Expansion into Dyson) could the hand tools drag its floor market with care business disruptive products  Economic downturn in  Weaker CNY to developed enhance its markets margins

 High sales contribution from some major customers such as Home Depot in the US

Recommendation Chart

Date Recommendation Target Price Price Price Close 2017-04-04 Buy 37.0 31.9

39 Recommendations & Target Price 2017-03-16 Buy 36.5 31.8

16.2 16.2 23.5 24.3 34.8 18.6 18.6 20.9 24.8 25.6 25.4 29.6 30.0 31.7 35.5 35.5 36.5 13.1 13.1 2017-01-03 Buy 35.5 28.8 34

2016-11-16 Buy 34.8 28.8

25.4 25.4 37.0 29 2016-09-08 Buy 35.5 30.5 2016-08-21 Buy 35.5 30.5 24 2016-03-17 Neutral 31.7 30.0 2016-01-14 Neutral 30.0 29.6 19 2015-08-20 Neutral 29.6 29.1 14 2014-08-22 Neutral 25.4 23.9 Source: RHB, Bloomberg Buy Neutral Sell Trading Buy Take Profit Not Rated 9 Aug-12 Nov-13 Feb-15 Jun-16

Source: RHB, Bloomberg

See important disclosures at the end of this report 12

Techtronic Industries Hong Kong Results Review

Industrial | Misc. Manufacturer

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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Techtronic Industries Hong Kong Results Review

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Techtronic Industries Hong Kong Results Review

Industrial | Misc. Manufacturer

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Techtronic Industries Hong Kong Results Review

Industrial | Misc. Manufacturer

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