16 August 2018 Hong Kong

EQUITIES Techtronic Industries

669 HK Outperform Strong growth momentum to continue Price (at 08:50, 16 Aug 2018 GMT) HK$40.50

Valuation HK$ 50.00-70.00 Key points - PER  Reiterate Outperform and lift TP from HK$60.0 to HK$62.0. 12-month target HK$ 62.00 Sustainable strong growth from continuous investment in OPEX. Upside/Downside % +53.1  12-month TSR % +55.5  Mgmt believes potential tariff change will not impact its gross margin. Volatility Index Low GICS sector Event Consumer Durables & Apparel Market cap HK$m 74,196  After attending TTI’s analyst meeting, we have higher confidence on the Market cap US$m 9,452 sustainability of its double-digit earnings growth in the long run. Free float % 75 Impact 30-day avg turnover US$m 19.4 Number shares on issue m 1,832  Strong growth to sustain. Mgmt emphasized the 1H18 strong growth is purely organic, not at expense of 2H18 growth, and its single digit % revenue Investment fundamentals guidance appears conservative. The impressive Milwaukee revenue growth of Year end 31 Dec 2017A 2018E 2019E 2020E 30% was thanks mainly to innovative products, such as third generation of Revenue m 6,063.6 6,948.7 7,712.9 8,565.3 brushless motors, and powerful products that are replacing corded products EBIT m 519.2 613.2 713.1 821.1 EBIT growth % 15.3 18.1 16.3 15.2 and M12 compact tools; as well as strong growth in Europe (+43% YoY), Reported profit m 470.4 558.8 659.5 769.4 Canada and Australia, in addition to continuous strength in US. We believe the Adjusted profit m 482.5 558.8 659.5 769.4 accelerated revenue growth is a reward of its past OPEX investment. EPS rep ¢ 25.7 30.5 36.0 42.0 EPS rep growth % 14.9 18.7 18.1 16.7  Continuous OPEX investment for future growth. TTI’s OPEX increased EPS adj ¢ 26.3 30.5 36.0 42.0 30bps YoY in 1H18, on a 30bps decline in non-strategic SG&A expense and EPS adj growth % 17.7 15.7 18.1 16.7 PER rep x 20.1 16.9 14.3 12.3 60bps growth for strategic investment, such as R&D (+21bps), geographic PER adj x 19.6 16.9 14.3 12.3 expansion and end-user conversion. We expect the strong growth in high-end Total DPS ¢ 8.7 10.9 13.2 15.8 new products to continue to lift TTI’s gross margin, leaving more room for Total div yield % 1.7 2.1 2.5 3.1 OPEX investment, in turn leading to stronger demand growth in the future, ROA % 9.7 10.8 11.9 12.5 ROE % 18.8 19.0 19.6 19.9 making a positives circle. EV/EBITDA x 13.0 11.4 10.3 9.2 Net debt/equity % 1.0 -6.4 -14.0 -20.9  Well prepared for any tariff changes. While actual sales % of the products in P/BV x 3.5 3.0 2.6 2.3 the potential higher tariff lists is yet to be known, TTI has built a new factory in Vietnam, plus six plants in the US and two plants in Europe to ensure 669 HK rel HSI performance, & rec history production flexibility. Mgmt assures it won’t let tariffs impact its gross margins. We also believe TTI’s faster new product launches allow it to pass through higher costs from material, FX and tariff volatilities.

Earnings and target price revision  We lift our EPS forecasts by 2% and 3% for 2018-19E to reflect stronger than expected sales growth. We lift our TP from HK$60.0 to HK$62.0 based on an unchanged 22x 2019E PER.

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Price catalyst Source: FactSet, Macquarie Research, August 2018 (all figures in USD unless noted, TP in HKD)  12-month price target: HK$62.00 based on a PER methodology.

 Catalyst: 2H18 result to be announced in March 2019

Action and recommendation Analysts

Macquarie Capital Limited, Taiwan Securities Branch  Reiterate Outperform. TTI is trading at 18.7x/15.9x 2018/19E PER, 0.9x

Corinne Jian, CFA +886 2 2734 7522 PEG, compared with the 17.8x/16.1x PER and 1.4x PEG for global peers, TTI [email protected] is our top pick in the Asia Home Improvement sector. We hold a long term

Shannen Lin +886 2 2734 7518 positive view on TTI’s brand value, innovation capability and valuable battery [email protected] user base (30% US household penetration), and see any share price pull back

due to trading war concerns as good buying opportunity. Please refer to page 11 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

Macquarie Research Techtronic Industries

Analysis

Fig 1 1H18 results summary 1H18 Actual YoY HoH MACQ Diff

Net Sales 3,431 19% 8% 3,182 8% Real. Gross Profit 1,274 21% 9% 1,185 7% EBIT 281 21% -2% 275 2% Pre-Tax Income 275 23% -2% 271 2% Net income 255 25% -4% 248 3% EPS (cent) 13.9 24% -4% 13.5 3%

Margin Gross margin 37.1% +0.5ppts +0.3ppts 37.3% -0.1ppts EBIT margin 8.2% +0.1ppts -0.8ppts 8.6% -0.5ppts Net margin 7.4% +0.3ppts -0.9ppts 7.8% -0.4ppts Source: Company data, Macquarie Research, August 2018

Fig 2 1H18 revenue and EBIT breakdown by products Unit: US$m 1H18 YoY HoH MACQ Diff

Net Sales 3,431 19% 8% 3,182 8% - Power Equipment 2,962 20% 11% 2,787 6% - Floor care 469 13% -8% 394 19%

EBIT 281 21% -2% 275 2% - Power equipment 280 21% 0% 271 4% - Floor care 1 58% -92% 4 -87%

EBIT margin 8.2% +0.1ppts -0.8ppts 8.6% -0.5ppts - Power equipment 9.5% 0.0ppts -1.0ppts 9.7% -0.3ppts - Floor care 0.1% 0.0ppts -1.3ppts 1.1% -1.0ppts Source: Company Data, Bloomberg, Macquarie Research, August 2018

Fig 3 TTI is gaining share in power tool market. Sales growth comparison, 1H18 Fig 4 Global Milwaukee brand sales YoY growth

35% 35%

30% 30%

25% 25%

20% 20% 15% 15% 10% 10% 5% 5% 0% Milwaukee brand TTI's total power Makita SWK's T&S 0% equipment organic 2013 2014 2015 2016 2017 1H18 Source: Company data, Macquarie Research, August 2018 Source: Company, Macquarie Research, August 2018

Fig 5 1H18 revenue breakdown by region Unit: US$m 1H18 YoY % of Sales

Net Sales 3,431 19% 100% - US 2,599 18% 76% - Europe 555 24% 16% - ROW 277 18% 8% Source: Company Data, Bloomberg, Macquarie Research, August 2018

16 August 2018 2 Macquarie Research Techtronic Industries

Fig 6 TTI sales YoY growth by region Fig 7 Milwaukee brand sales YoY growth by region

25% 45%

40%

20% 35%

30% 15% 25%

20% 10% 15%

5% 10% 5%

0% 0% US EU ROW US EU ROW Source: Company data, August 2018 Source: Company, August 2018

Fig 8 P&L forecasts, 2010-2020E Unit: US$m 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Net Sales 3,396 3,667 3,852 4,300 4,753 5,038 5,480 6,064 6,949 7,713 8,565 Real. Gross Profit 1,093 1,194 1,289 1,472 1,673 1,798 1,985 2,226 2,586 2,907 3,269 EBIT 169 219 259 301 350 400 450 519 613 713 821 Pre-Tax Income 96 161 222 276 325 387 440 505 603 711 830 Net income 95 152 201 250 300 354 409 470 559 659 769 EPS (cent) 5.95 9.47 11.42 13.68 16.41 19.37 22.32 25.66 30.50 36.00 42.00 YoY 51% 60% 32% 25% 20% 18% 15% 15% 19% 18% 17% Recurring EPS (cent) 6.93 9.38 11.94 13.54 17.27 19.92 22.36 26.32 30.50 36.00 42.00 YoY 42% 36% 40% 18% 28% 15% 12% 18% 16% 18% 17% Source: Company data, Macquarie Research, August 2018

Fig 9 Earnings revisions, 2018-20E 2018E 2019E 2020E Unit: US$m Old New Diff Old New Diff Old New Diff

Net Sales 6,605 6,949 5% 7,292 7,713 6% 8,079 8,565 6% Real. Gross Profit 2,465 2,586 5% 2,752 2,907 6% 3,081 3,269 6% GM% 37.3% 37.2% -0.1ppts 37.7% 37.7% 0.0ppts 38.1% 38.2% 0.0ppts EBIT 599 613 2% 690 713 3% 795 821 3% EBIT margin 9.1% 8.8% -0.2ppts 9.5% 9.2% -0.2ppts 9.8% 9.6% -0.3ppts Net income 550 559 2% 642 659 3% 744 769 3% EPS (cent) 30.00 30.50 2% 35.00 36.00 3% 40.60 42.00 3% Recurring EPS (cent) 30.00 30.50 2% 35.00 36.00 3% 40.60 42.00 3% Source: Macquarie Research, August 2018

Fig 10 Macquarie forecasts vs Bloomberg consensus, 2018-20E 2018E 2019E 2020E Unit: US$m BBG MACQ Diff BBG MACQ Diff BBG MACQ Diff

Net Sales 6,750 6,949 3% 7,415 7,713 4% 8,303 8,565 3% Real. Gross Profit 2,511 2,586 3% 2,788 2,907 4% 3,155 3,269 4% GM% 37.2% 37.2% 0.0ppts 37.6% 37.7% +0.1ppts 38.0% 38.2% +0.2ppts EBIT 615 613 0% 722 713 -1% 839 821 -2% EBIT margin 9.1% 8.8% -0.3ppts 9.7% 9.2% -0.5ppts 10.1% 9.6% -0.5ppts Net income 558 559 0% 658 659 0% 770 769 0% EPS (US$ cent) 30.60 30.50 0% 36.30 36.00 -1% 42.40 42.00 -1% Source: Bloomberg, Macquarie Research, August 2018

16 August 2018 3 Macquarie Research Techtronic Industries

Fig 11 Power-tool sector valuation comparison Market 30-day Net Cap trading Price TP PER PER 18-20 EPS PEG PBR ROE ROIC Div yield gearing Name Code US$m US$m Lcy Rec Lcy Upside 18E 19E CAGR 19E 18E 18E 18E 18E 18E

HK/China 10,467 24.2 38% 18.7 15.9 17% 0.9 3.3 19% 20% 1.9% -6% Techtronics 669 HK 10,467 24.2 44.85 O 62 38% 18.7 15.9 17% 0.9 3.3 19% 20% 1.9% -6% Taiwan 603 11.0 64% 14.7 8.2 14% 0.6 2.3 26% 56% 6.1% -53% Basso 1527 TT 287 1.9 64.00 O 105 64% 9.9 8.2 14% 0.6 2.3 26% 56% 6.1% -53% Rexon 1515 TT 295 9.0 50.00 NR NR NA 19.5 NA nmf NA NA NA NA NA NA De Poan 1570 TT 21 0.0 12.80 NR NR NA NA NA nmf NA NA NA NA NA NA Japan 13,303 26.6 4% 20.6 18.2 10% 1.9 2.2 10% 16% 1.5% -34% Makita 6586 JP 12,120 20.3 4,795 N 5,000 4% 21.0 19.0 10% 1.9 2.2 10% 16% 1.4% -34% Ryobi 5851 JP 1,183 6.3 4,015 NR NR NA 16.7 10.3 nmf NA NA NA NA 1.7% NA USA 101,378 782.0 30% 17.4 15.8 12% 1.4 7.0 39% 20% 2.2% 75% Stanley Black & Decker SWK US 21,169 233.7 138.35 O 180 30% 16.6 14.9 12% 1.2 2.4 15% 11% 1.8% 39% Illinois Tool Works ITW US 46,477 266.0 138.59 NR NR NA 18.2 16.8 10% 1.6 11.8 65% 30% 2.5% 121% Ingersoll Rand IR US 24,016 142.5 97.90 NR NR NA 17.8 15.8 15% 1.1 3.3 19% 14% 2.0% 37% Snap-on Tools SNA US 9,717 139.8 172.28 NR NR NA 14.6 13.5 11% 1.3 2.9 20% 15% 2.0% 29% Total/Average 125,752 843.8 17.8 16.1 12% 1.4 6.2 35% 20% 2.1% 56% Source: Bloomberg, Macquarie Research, August 2018. Pricing date: 16 August 2018. Bloomberg consensus used for non-rated stocks. US stocks covered by Adam Baumgarten; Japan stock covered by Kunio Sakaida. For Japanese stocks, we use their FY19/20 (ended in March 2019/2020) to calculate the number of CY18-19E in the valuation table.

Fig 12 Historical forward PER - Techtronic Fig 13 Historical forward EV/EBITDA - Techtronic

(x) (x) 30.0 16.0 14.0 25.0 12.0 20.0 10.0

15.0 8.0 6.0 10.0 4.0 5.0 2.0

0.0 0.0

Jan-13 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-15 Jan-17

Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

Sep-13 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-15 Sep-17

Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17

May-14 May-04 May-06 May-08 May-10 May-12 May-16 May-18

May-04 May-06 May-08 May-10 May-12 May-14 May-16 May-18 Monthly PER Avg PER Monthly EV/EBITDA Avg EV/EBITDA

Source: Bloomberg, Macquarie Research, August 2018 Source: Bloomberg, Macquarie Research, August 2018

16 August 2018 4 Macquarie Research Techtronic Industries

Fig 14 Home improvement sector valuation comparison Market 30-day Net

Cap trading Price TP PER 18-20 EPS PEG P/BV ROE ROIC Div yield gearing Name Code US$m US$m Lcy Rec Lcy Upside 18E 19E CAGR 19E 18E 18E 18E 18E 18E

HK/China 15,387 46.8 38% 16.8 14.3 17% 0.8 3.1 19% 22% 2.3% -10% Techtronics 669 HK 10,467 24.2 44.85 O 62 38% 18.7 15.9 17% 0.9 3.3 19% 20% 1.9% -6% Man Wah 1999 HK 2,364 5.1 4.84 NR NR NA 10.3 8.8 14% 0.6 2.7 27% 30% 5.8% -11% Hangzhou Great Star 002444 CH 1,514 8.8 11.41 NR NR NA 15.1 13.6 23% 0.6 1.8 9% NA 0.5% -30% Dare Power Dekor 000910 CH 1,042 8.6 21.80 NR NR NA 14.6 12.1 21% 0.6 2.8 18% NA 0.6% NA Taiwan 4,129 17.9 -21% 20.5 17.5 8% 2.4 5.8 30% 48% 4.1% -39% Basso 1527 TT 287 1.9 64.00 O 105 64% 9.9 8.2 14% 0.6 2.3 26% 56% 6.1% -53% Nien Made 8464 TT 2,541 4.6 267.00 U 185 -31% 21.2 18.8 7% 2.6 6.2 30% 48% 3.9% -37% Rexon 1515 TT 295 9.0 50.00 NR NR NA 19.5 NA nmf NA NA NA NA NA NA Fu Hsing 9924 TT 214 0.1 34.95 NR NR NA NA NA nmf NA NA NA NA NA NA Sunspring 2062 TT 190 0.4 35.80 NR NR NA 40.7 NA nmf NA NA NA NA NA NA Keysheen 8427 TT 142 0.0 42.00 NR NR NA NA NA nmf NA NA NA NA NA NA MJ International 8466 TT 117 0.1 54.50 NR NR NA 6.7 NA nmf NA NA NA NA NA NA Chang Type 1541 TT 94 0.0 36.60 NR NR NA NA NA nmf NA NA NA NA NA NA Ching Feng 9935 TT 76 0.2 17.95 NR NR NA NA NA nmf NA NA NA NA NA NA Coaster 2936 TT 61 0.0 24.65 NR NR NA 19.9 9.2 nmf NA NA NA NA 4.1% NA Chiu Ting 1539 TT 51 1.4 24.05 NR NR NA 9.7 NA nmf NA NA NA NA NA NA Green River 8426 TT 40 0.0 24.55 NR NR NA NA NA nmf NA NA NA NA NA NA De Poan 1570 TT 21 0.0 12.80 NR NR NA NA NA nmf NA NA NA NA NA NA Japan 26,109 69.5 4% 19.3 16.8 10% 2.0 1.9 10% 12% 2.0% -3% Makita 6586 JP 12,120 20.3 4,795 N 5,000 4% 21.0 19.0 10% 1.9 2.2 10% 16% 1.4% -34% Toto 5332 JP 7,285 22.8 4,560 NR NR NA 20.0 18.8 6% 3.3 2.2 11% 13% 1.9% -15% LIXIL 5938 JP 5,521 20.0 1,952 NR NR NA 15.2 10.8 17% 0.7 0.9 6% 3% 3.5% 79% Ryobi 5851 JP 1,183 6.3 4,015 NR NR NA 16.7 10.3 nmf NA NA NA NA 1.7% NA USA 147,974 1,417 19% 16.8 15.1 13% 1.5 5.7 33% 18% 2.1% 68% Stanley B&D SWK US 21,169 233.7 138.35 O 180 30% 16.6 14.9 12% 1.2 2.4 15% 11% 1.8% 39% Mohawk Industries MHK US 13,808 289.0 185.08 O 212 15% 13.5 13.3 3% 4.1 1.8 14% 11% 0.0% 26% Fortune Brands FBHS US 7,725 95.5 54.24 O 68 25% 14.8 13.1 14% 0.9 3.2 21% 13% 1.5% 58% Owens Cornings OC US 6,434 128.2 58.01 N 66 14% 11.4 9.4 17% 0.5 1.4 13% 8% 1.4% 64% USG Corporations USG US 6,015 38.2 43.12 N 43.50 1% 19.7 15.8 22% 0.7 2.9 16% 13% 0.0% 21% Armstrong World AWI US 3,611 39.2 69.90 N 70 0% 18.3 15.4 24% 0.7 8.7 48% 19% 0.0% 157% Top Build Corp BLD US 2,612 26.0 73.28 N 83 13% 17.5 14.4 30% 0.5 2.2 13% 8% 0.0% 52% Masonite International DOOR US 1,847 9.3 66.95 O 79 18% 16.2 13.4 22% 0.6 2.4 16% 9% 0.0% 64% Interface TILE US 1,348 7.7 22.65 N 26 15% 15.4 12.4 20% 0.6 3.5 24% 17% 1.2% 44% Armstrong Flooring AFI US 422 1.8 16.38 N 15 -8% 42.6 25.9 59% 0.4 0.8 2% 2% 0.0% 2% Illinois Tool Works ITW US 46,477 266.0 138.59 NR NR NA 18.2 16.8 10% 1.6 11.8 65% 30% 2.5% 121% Ingersoll Rand IR US 24,016 142.5 97.90 NR NR NA 17.8 15.8 15% 1.1 3.3 19% 14% 2.0% 37% Snap-on Tools SNA US 9,717 139.8 172.28 NR NR NA 14.6 13.5 11% 1.3 2.9 20% 15% 2.0% 29% Hunter Douglas HDG NA 2,774 0.2 68.80 NR NR NA NA NA nmf NA NA NA NA NA NA Regional Total/Avg ex 193,599 1,551.3 NA 17.2 15.3 13% 1.5 5.0 29% 18% 2.2% 50%

US retailers Home improve. 302,804 1,112.5 NA 19.9 18.2 15% 1.2 124.5 607% 39% 2.0% 1286% retailers in US Home Depot HD US 223,776 768.9 193.99 NR NR NA 20.6 19.1 15% 1.3 164.0 796% 45% 2.1% 1653% Lowe's LOW US 79,028 343.7 96.83 NR NR NA 18.0 15.9 16% 1.0 12.5 69% 20% 1.8% 245% Source: Bloomberg, Macquarie Research, August 2018. Pricing date: 16 August 2018. Bloomberg consensus used for non-rated stocks. US retail stocks covered by Adam Baumgarten. JP stocks covered by Kunio Sakaida (6586 JP). * For Japanese stocks, we use their FY19/20 (ended in March 2019/2020) to calculate the number of CY18-19E in the valuation table.

Fig 15 1H18 revenue breakdown Fig 16 1H18 EBIT breakdown

Floor caring 0%

Floor caring 14%

Power Power equipment equipment 100% 86%

Source: Company data, Macquarie Research, August 2018 Source: Company data, Macquarie Research, August 2018

16 August 2018 5 Macquarie Research Techtronic Industries

Fig 18 TTI’s power equipment segment sales and YoY Fig 17 TTI’s strong margin expansion will continue growth

US$m 39.0% 10.0% 8,000 18% Both GM% and EBIT margin have 38.0% 16% been consistently expanding. 9.0% 7,000 37.0% 6,000 14% 36.0% 8.0% 12% 35.0% 5,000 7.0% 10% 34.0% 4,000 6.0% 8% 33.0% 3,000 6% 32.0% 5.0% 2,000 31.0% 4% 4.0% 30.0% 1,000 2% 29.0% 3.0% 0 0%

TTI's Gross margin TTI's EBIT margin (RHS) Power equipment sales YoY (RHS)

Source: Company data, Macquarie Research, August 2018 Source: Company, Macquarie Research, August 2018

Fig 19 New home sales vs historical average (annual) Fig 20 Housing starts vs historical average (annual)

000 units 000 units 1400 2,500

1200 2,000 1000

800 1,500

600 1,000 400 500 200

0 0

1985 1981 2007 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 1965 1967 1969 1971 1973 1975 1977 1979 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2009 2011 2013 2015 2017

New home sales Average New housing starts Average

Source: US Census Bureau, Macquarie Research, August 2018 Source: US Census Bureau, Macquarie Research, August 2018

Fig 22 Existing home inventory – month of supply (inverse) Fig 21 New home sales vs new home starts (monthly) vs housing prices (monthly)

000 units index months 2,500 300 2 280 4 2,000 260 240 1,500 6 220 200 8 1,000 180 10 500 160 140 12 0 120

100 14

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Jan-02 Jan-00 Jan-01 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Annualized housing start Housing start avg Jan-99 Annualized new home sales New home sales avg US existing home price Housing inventory, inverse (RHS)

Source: US Census Bureau, Macquarie Research, August 2018 Source: US Census Bureau, Macquarie Research, August 2018 16 August 2018 6 Macquarie Research Techtronic Industries

Fig 23 Building material is gaining wallet share… Fig 24 … at the expense of apparel industry

US$m US$m 400,000 10.5% 250,000 5.5%

350,000 10.0% 5.3% 200,000 5.1% 300,000 9.5% 9.0% 4.9% 250,000 8.5% 150,000 4.7% 200,000 4.5% 8.0% 150,000 100,000 4.3% 7.5% 4.1% 100,000 7.0% 50,000 3.9% 50,000 6.5% 3.7% 0 6.0%

0 3.5%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

5M18

1993 1994 1995 1996 1997 1992 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 5M18

Total building material % of total retail sales (RHS) Total clothing store sales % of total retail sales (RHS)

Source: US Census Bureau, Macquarie Research, August 2018 Source: US Census Bureau, Macquarie Research, August 2018

Fig 25 Positive cycle of cordless power tool ecosystem

Source: Company data, Macquarie Research, August 2018

16 August 2018 7 Macquarie Research Techtronic Industries

Company profile Background

 Techtronic (TTI) is a global leading power tools company, selling through multiple brands, such as Milwaukee and Ryobi. Globally, it is the largest power tools brand in the consumer/DIY market (>50% market share), and No. 4 in the professional segment (5-10% market share) on our estimates.  Around 85% of TTI’s revenue in 2016 came from the power equipment segment and 15% from floor care. More than 50% of its power equipment revenue is power tools, of which 50-55% of the revenue is from consumer/DIY segment and the remainder professional, mostly cordless power tools.  TTI’s regional and client concentration is higher than peers. Around 76% of its 2017 revenue was from the US, 15% from Europe and the remainder Asia. 45.5% of its revenue is from the largest client, Home Depot. It has a big production site in Dongguan, southern China, which contributed ~75% of its total capacity in 2016, and the remainder in the US and Europe.  TTI was founded by Mr. Horst Julius Pudwill and Professor Roy Chi Ping Chung in Hong Kong. Currently mgmt owns a ~28% stake in the company. Management and Directors background

 Horst Julius Pudwill, aged 73, is chairman and founder of TTI. Until 2008, he also served as CEO. He focuses on the strategic planning and development and continues to have oversight of the operations.  Joseph Galli Jr, aged 59, has served as the CEO of TTI since 2008. He is responsible for daily operations, integrating acquisitions, and enhancing the brand portfolio. Previously, he was with SWK with various senior mgmt roles.  Stephan Horst Pudwill, Executive Director and Vice Chairman, aged 41, joined the Group in 2004. He is mainly responsible for managing, improving and monitoring internal operations and identifying synergistic business opportunities within the Group. Prior to joining the Group, Mr Pudwill held managerial positions at Daimler Chrysler AG that included product marketing and strategic planning for the Mercedes-Benz car group.  CPA: Deloitte

Fig 26 Sales breakdown by segment, 2017A Fig 27 Sales breakdown by region, 2017A

Others Floor caring 9% 12%

Europe 15%

Power US equipment 76% 88%

Source: Company data, Macquarie Research, August 2018 Source: Company data, Macquarie Research, August 2018

16 August 2018 8 Macquarie Research Techtronic Industries Macquarie Quant View The Quant View page below has been derived from models that are developed and maintained by Sales and Trading personnel at Macquarie. The models are not a product of the Macquarie Research Department.

The quant model currently holds a marginally positive view on Techtronic Attractive Displays where the Industries. The strongest style exposure is Growth, indicating this stock has company’s ranked based on good historic and/or forecast growth. Growth metrics focus on both top and s l the fundamental consensus

a bottom line items. The weakest style exposure is Earnings Momentum, t

n Price Target and indicating this stock has received earnings downgrades and is not well liked e Macquarie’s Quantitative by sell side analysts. m a Alpha model.

d

n

294/655 u Two rankings: Local market F (Hong Kong) and Global Global rank in sector (Consumer Durables Consumer Durables & Apparel Quant & Apparel) % of BUY recommendations 60% (3/5) Local market rank Global sector rank Number of Price Target downgrades 0 Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their (higher is better). contribution to the current overall Alpha score.

Ingersoll-Rand 1.1 Ingersoll-Rand

Makita 0.8 Makita

Snap-On 0.5 Snap-On

Stanley Black & Decker 0.5 Stanley Black & Decker

Techtronic Industries 0.3 Techtronic Industries

Ryobi -1.5 Ryobi

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 Valuations Growth Profitability Earnings Price Quality Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple. revisions. Current score shown below.

Ingersoll-Rand Ingersoll-Rand 0.2 Makita Makita -0.2 Snap-On Snap-On 0.8 Stanley Black & Decker Stanley Black & Decker -0.4 Techtronic Industries Techtronic Industries 0.9

Ryobi 0.7 Ryobi

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -70% -50% -30% -10% 10% 30% 50% 70% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is returns over the last 5 years. better) and the percentile rank relative to the sector and market. ⇐ Negatives Positives ⇒ Normalized Percentile relative Percentile relative Price to Earnings NTM 40% Score to sector(/655) to market(/584) Alpha Model Score 0.30 Price to Earnings LTM 35% Valuation -0.30 DPS Revisions 3 Month 35% Growth 0.22 EV/EBITDA LTM 31% Profitability -0.14 Earnings Momentum -0.31 Relative Turnover -15% Price Momentum 0.21 Asset Growth -16% Quality 0.16 Capital & Funding 0.13 Turnover (USD) 20 Day -17% Liquidity -1.16 Momentum 12 Month -19% Risk -0.09 Technicals & Trading 1.01 -40% -20% 0% 20% 40% 0 50 100 0 50 100 0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

16 August 2018 9 Macquarie Research Techtronic Industries

Techtronic Industries (669 HK, Outperform, Target Price: HK$62.00) Interim Results 1H/18A 2H/18E 1H/19E 2H/19E Profit & Loss 2017A 2018E 2019E 2020E

Revenue m 3,431 3,518 3,810 3,903 Revenue m 6,064 6,949 7,713 8,565 Gross Profit m 1,274 1,312 1,432 1,475 Gross Profit m 2,226 2,586 2,907 3,269 Cost of Goods Sold m 2,157 2,206 2,377 2,429 Cost of Goods Sold m 3,837 4,363 4,806 5,297 EBITDA m 398 435 432 491 EBITDA m 735 833 923 1,034 Depreciation m 117 103 105 105 Depreciation m 216 220 209 213 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 281 332 327 386 EBIT m 519 613 713 821 Net Interest Income m -5 -5 -1 -1 Net Interest Income m -14 -11 -2 8 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m 0 0 0 0 Exceptionals m -12 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 2 0 0 0 Other Pre-Tax Income m -0 -0 0 -0 Other Pre-Tax Income m 10 -0 -0 -0 Pre-Tax Profit m 275 327 326 385 Pre-Tax Profit m 505 603 711 830 Tax Expense m -21 -23 -24 -27 Tax Expense m -35 -44 -51 -60 Net Profit m 255 304 302 358 Net Profit m 471 559 660 770 Minority Interests m -0 -0 -0 -0 Minority Interests m -0 -0 -0 -0

Reported Earnings m 255 304 301 358 Reported Earnings m 470 559 659 769 Adjusted Earnings m 255 304 301 358 Adjusted Earnings m 483 559 659 769

EPS (rep) 0.14 0.17 0.16 0.20 EPS (rep) 0.26 0.30 0.36 0.42 EPS (adj) 0.14 0.17 0.16 0.20 EPS (adj) 0.26 0.30 0.36 0.42 EPS Growth yoy (adj) % 21.5 11.4 18.5 17.7 EPS Growth (adj) % 17.7 15.7 18.1 16.7 PE (rep) x 20.1 16.9 14.3 12.3 PE (adj) x 19.6 16.9 14.3 12.3

EBITDA Margin % 11.6 12.4 11.3 12.6 Total DPS 0.09 0.11 0.13 0.16 EBIT Margin % 8.2 9.4 8.6 9.9 Total Div Yield % 1.7 2.1 2.5 3.1 Earnings Split % 45.6 54.4 45.7 54.3 Basic Shares Outstanding m 1,833 1,832 1,832 1,832 Revenue Growth % 19.1 10.6 11.0 11.0 Diluted Shares Outstanding m 1,832 1,833 1,832 1,832 EBIT Growth % 20.8 15.9 16.5 16.1

Profit and Loss Ratios 2017A 2018E 2019E 2020E Cashflow Analysis 2017A 2018E 2019E 2020E

Revenue Growth % 10.6 14.6 11.0 11.1 EBITDA m 729 827 916 1,028 EBITDA Growth % 13.7 13.4 10.7 12.1 Tax Paid m -35 -44 -51 -60 EBIT Growth % 15.3 18.1 16.3 15.2 Chgs in Working Cap m -16 -128 -117 -131 Gross Profit Margin % 36.7 37.2 37.7 38.2 Net Interest Paid m -24 -37 -26 -20 EBITDA Margin % 12.1 12.0 12.0 12.1 Other m -55 10 21 24 EBIT Margin % 8.6 8.8 9.2 9.6 Operating Cashflow m 598 629 742 840 Net Profit Margin % 8.0 8.0 8.6 9.0 Acquisitions m -3 0 0 0 Payout Ratio % 33.0 35.6 36.5 37.5 Capex m -325 -240 -240 -240 EV/EBITDA x 13.0 11.4 10.3 9.2 Asset Sales m 0 0 0 0 EV/EBIT x 18.4 15.5 13.4 11.6 Other m 0 0 0 0 Investing Cashflow m -328 -240 -240 -240 Balance Sheet Ratios Dividend (Ordinary) m -136 -159 -199 -241 ROE % 18.8 19.0 19.6 19.9 Equity Raised m 4 0 0 0 ROA % 9.7 10.8 11.9 12.5 Debt Movements m -79 -300 -150 -100 ROIC % 18.6 20.5 22.5 24.6 Other m 0 0 0 0 Net Debt/Equity % 1.0 -6.4 -14.0 -20.9 Financing Cashflow m -212 -459 -349 -341 Interest Cover x 37.9 57.7 362.8 nmf Price/Book x 3.5 3.0 2.6 2.3 Net Chg in Cash/Debt m 119 -35 188 294 Book Value per Share 1.5 1.7 2.0 2.3 Free Cashflow m 273 389 502 600

Balance Sheet 2017A 2018E 2019E 2020E

Cash m 896 825 978 1,238 Receivables m 1,117 1,184 1,314 1,460 Inventories m 1,467 1,571 1,731 1,907 Investments m 0 0 0 0 Fixed Assets m 720 754 784 812 Intangibles m 0 0 0 0 Other Assets m 1,399 1,414 1,431 1,449 Total Assets m 5,598 5,748 6,239 6,866 Payables m 1,653 1,696 1,869 2,060 Short Term Debt m 351 151 101 101 Long Term Debt m 573 473 373 273 Provisions m 0 0 0 0 Other Liabilities m 280 287 294 302 Total Liabilities m 2,858 2,608 2,638 2,736 Shareholders' Funds m 2,888 3,288 3,748 4,276 Minority Interests m -1 -1 -1 -1 Other m -147 -147 -146 -146 Total S/H Equity m 2,741 3,140 3,601 4,130 Total Liab & S/H Funds m 5,598 5,748 6,239 6,866

All figures in USD unless noted. Source: Company data, Macquarie Research, August 2018

16 August 2018 10 Macquarie Research Techtronic Industries rtant disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield, which is currently around 9%. minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Mazi Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 30 June 2018 AU/NZ Asia RSA USA CA EUR Outperform 52.87% 61.26% 48.86% 47.54% 69.86% 46.61% (for global coverage by Macquarie, 3.51% of stocks followed are investment banking clients) Neutral 34.10% 27.25% 36.36% 46.72% 21.92% 43.22% (for global coverage by Macquarie, 2.10% of stocks followed are investment banking clients) Underperform 13.03% 11.49% 14.77% 5.74% 8.22% 10.17% (for global coverage by Macquarie, 0.00% of stocks followed are investment banking clients)

Company-specific disclosures:

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 15-Mar-2018 669 HK Outperform HK$60.00 07-Sep-2017 669 HK Outperform HK$55.00 18-Aug-2017 669 HK Outperform HK$49.00

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16 August 2018 12 Macquarie Research Techtronic Industries

16 August 2018 13

Equities

Asia Research Head of Equity Research Emerging Leaders Technology Jake Lynch (Asia – Head) (852) 3922 3583 Jake Lynch (Asia) (852) 3922 3583 Damian Thong (Asia, Japan) (813) 3512 7877 Hiroyuki Sakaida (Japan – Head) (813) 3512 6695 Kwang Cho (Korea) (822) 3705 4953 Allen Chang (Greater China) (852) 3922 1136 Conrad Werner (ASEAN – Head) (65) 6601 0182 Corinne Jian (Greater China) (8862) 2734 7522 Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Conrad Werner (ASEAN) (65) 6601 0182 Chris Yu (Greater China) (8621) 2412 9024 Automobiles, Auto Parts Bo Denworalak (Thailand) (662) 694 7774 Kaylin Tsai (Greater China) (8862) 2734 7523 Lynn Luo (Greater China) (8862) 2734 7534 Janet Lewis (China, Japan) (813) 3512 7856 Infrastructure, Industrials, Transportation Allen Yuan (China) (8621) 2412 9009 Patrick Liao (Greater China) (8862) 2734 7515 James Hong (Korea) (822) 3705 8661 Patrick Dai (China) (8621) 2412 9082 Verena Jeng (Greater China) (852) 3922 3766 Amit Mishra (India) (9122) 6720 4084 Eric Zong (China, Hong Kong) (852) 3922 4749 Daniel Kim (Korea) (822) 3705 8641 Kunio Sakaida (Japan) (813) 3512 7873 Abhishek Bhandari (India) (9122) 6720 4088 Banks and Financials James Hong (Korea) (822) 3705 8661 Farrah Aqlima (Malaysia) (603) 2059 8987 Scott Russell (Asia) (852) 3922 3567 Corinne Jian (Taiwan) (8862) 2734 7522 Telecoms Dexter Hsu (China, Taiwan) (8862) 2734 7530 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Keisuke Moriyama (Japan) (813) 3512 7476 Azita Nazrene (ASEAN) (65) 6601 0560 Allen Chang (Greater China) (852) 3922 1136 Prem Jearajasingam (ASEAN) (603) 2059 8989 Chan Hwang (Korea) (822) 3705 8643 Internet, Media and Software Suresh Ganapathy (India) (9122) 6720 4078 Nathania Nurhalim (Indonesia) (6221) 2598 8365 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Wendy Huang (Asia) (852) 3922 3378 Kervin Sisayan (Philippines) (632) 857 0893 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Marcus Yang (Greater China) (8862) 2734 7532 Utilities, Renewables Gilbert Lopez (Philippines) (632) 857 0892 Alankar Garude (India) (9122) 6720 4134 Ken Ang (Singapore) (65) 6601 0836 Hiroyuki Sakaida (Japan) (813) 3512 6695 Peach Patharavanakul (Thailand) (662) 694 7753 Oil, Gas and Petrochemicals Patrick Dai (China) (8621) 2412 9082 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Basic Materials, Commodities Aditya Suresh (Asia) (852) 3922 1265 Anna Park (Asia) (822) 3705 8669 Karisa Magpayo (Philippines) (632) 857 0899 David Ching (China, Hong Kong) (852) 3922 1823 Yasuhiro Nakada (Japan) (813) 3512 7862 Strategy, Country Yasuhiro Nakada (Japan) (813) 3512 7862 Corinne Jian (Taiwan) (8862) 2734 7522 Anna Park (Korea) (822) 3705 8669 Ben Shane Lim (Malaysia) (603) 2059 8868 Viktor Shvets (Asia, Global) (852) 3922 3883 Sumangal Nevatia (India) (9122) 6720 4093 Yupapan Polpornprasert (Thailand) (662) 694 7729 David Ng (China, Hong Kong) (852) 3922 1291 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Hiroyuki Sakaida (Japan) (813) 3512 6695 Farrah Aqlima (Malaysia) (603) 2059 8987 Pharmaceuticals and Healthcare Chan Hwang (Korea) (822) 3705 8643 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Conglomerates David Ng (China, Hong Kong) (852) 3922 1291 Xiang Gao (China, Hong Kong) (8621) 2412 9006 Inderjeetsingh Bhatia (India) (9122) 6720 4087 David Ng (China, Hong Kong) (852) 3922 1291 Corinne Jian (China) (8862) 2734 7522 Conrad Werner (ASEAN, Singapore) (65) 6601 0182 Gilbert Lopez (Philippines) (632) 857 0892 Alankar Garude (India) (9122) 6720 4134 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Conrad Werner (Singapore) (65) 6601 0182 Richardo Walujo (Indonesia) (6221) 259 88 369 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Gilbert Lopez (Philippines) (632) 857 0892 Consumer, Gaming Property, REIT Peach Patharavanakul (Thailand) (662) 694 7753 Linda Huang (Asia) (852) 3922 4068 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Zibo Chen (China, Hong Kong) (852) 3922 1130 David Ng (China, Hong Kong) (852) 3922 1291 Find our research at Terence Chang (China, Hong Kong) (852) 3922 3581 Kelvin Tam (China) (852) 3922 1181 Macquarie: www.macquarieresearch.com Sunny Chow (China, Hong Kong) (852) 3922 3768 Keisuke Moriyama (Japan) (813) 3512 7476 Thomson: www.thomson.com/financial Stella Li (China, Taiwan) (8862) 2734 7514 Tomoyoshi Omuro (Japan) (813) 3512 7474 Reuters: www.knowledge.reuters.com Leon Rapp (Japan) (813) 3512 7879 Abhishek Bhandari (India) (9122) 6720 4088 Bloomberg: MAC GO Kwang Cho (Korea) (822) 3705 4953 Richard Danusaputra (Indonesia) (6221) 2598 8368 Factset: http://www.factset.com/home.aspx Amit Sinha (India) (9122) 6720 4085 Aiman Mohamad (Malaysia) (603) 2059 8986 CapitalIQ www.capitaliq.com Robert Pranata (Indonesia) (6221) 2598 8366 Kervin Sisayan (Philippines) (632) 857 0893 Email [email protected] for access

Richardo Walujo (Indonesia) (6221) 2598 8369 Bo Denworalak (Thailand) (662) 694 7774 Denise Soon (Malaysia) (603) 2059 8845 Karisa Magpayo (Philippines) (632) 857 0899 Chalinee Congmuang (Thailand) (662) 694 7993

Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Amelia Mehta (Asia) (65) 6601 0211 Angus Kent (Thailand) (662) 694 7601 Michael Santos (Philippines) (632) 857 0813 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Ben Musgrave (UK/Europe) (44 20) 3037 4882 Chris Reale (New York) (1 212) 231 2555 Sandeep Bhatia (India) (9122) 6720 4101 Christina Lee (UK/Europe) (44 20) 3037 4873 Marc Rosa (New York) (1 212) 231 2555 Thomas Renz (Geneva) (41 22) 818 7712 Justin Morrison (Singapore) (65) 6601 0288 Tomohiro Takahashi (Japan) (813) 3512 7823 Sales Trading Daniel Clarke (Taiwan) (8862) 2734 7580 John Jay Lee (Korea) (822) 3705 9988 Adam Zaki (Asia) (852) 3922 2002 Brendan Rake (Thailand) (662) 694 7707 Nik Hadi (Malaysia) (603) 2059 8888 Stanley Dunda (Indonesia) (6221) 515 1555 Mike Keen (UK/Europe) (44 20) 3037 4905 Gino C Rojas (Philippines) (632) 857 0861

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