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Techtronic Industries Target Price: HKD46.00 Price: HKD38.60 Tapping Into a New Huge Potential Market Cap: USD9,037M Bloomberg Ticker: 669 HK

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Techtronic Industries Target Price: HKD46.00 Price: HKD38.60 Tapping Into a New Huge Potential Market Cap: USD9,037M Bloomberg Ticker: 669 HK Results Review Hong Kong 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 Hang Seng Index (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 - - - - - 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 See important disclosures at the end of this report 1 Powered by the EFA Platform Techtronic Industries Hong Kong 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 RYOBI, Pre-tax profit 387 440 526 627 738 Milwaukee, AEG, Homelite, VAX and Dirt Devil. 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 See important disclosures at the end of this report 2 Techtronic Industries Hong Kong Results Review 18 August 2017 Industrial | Misc.
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