tk group (holdings) limited (2283 hk) buckled up for the
TRANSCRIPT
Page 1 / 36
12 November 2014
Hayman Chiu
(852) 2235 7677
Trading Data
52-Week Range (HK$)
3 Mth Avg Daily Vol (m)
No of Shares (m)
Market Cap (HK$m)
Major Shareholders (%)
Auditors
Result Due
1.87/0.96
5.0
826.6
1,512.7
Li Pui Leung & As
so. (60.57%)
PWC
FY14:March 2015
Company description
TK Group Holdings Limited (“TK”) is a one-stop
total plastics solutions provider in PRC, who
engaged in the design and fabrication of plastic
injection molds and manufacturing of plastic
components employing the plastic injection
molds. Its customers are believed to include
world renowned brands such as Apple,
Sandisk, Fitbit, Philips, Polycom and major
German automobile brands. TK Group ranked
the second in terms of revenue from fabricating
plastic injection molds in the PRC in 2012.
Price Chart
Sources: Bloomberg, CIRL
Positive 2H14 outlook on rising capacity utilization TK management expressed strong order flow in its plastic injection segment (accounted for 56% of revenue in 1H14), after undergoing a flattish 1H14 .Its capacity utilization has been ramping up from 56.9% in 1H14 to ~80% in recent months. We believe TK has secured substantial orders from customers in the consumer electronics segment, hence driving both the segment’s as well as the Group’s GPM. We forecast plastic injection segment’s GPM will be on uptrend due to: i) improved utilization & ii) ramping up of smart wearable devices by its clients.
Benefit from the growth of wearable devices According to IDC and GSMA intelligence, worldwide shipments on wearable devices (include both basic and smart wearables) are expected to grow at 52.4% CAGR to 120mn pieces by 2018. As TK has already become a major plastic part supplier to FitBit, we also expect orders from new clients like Jabra, Jawbone and Gopro to ramp up in FY15E, hence driving the growth of plastic injection segment. By breaking into the supply chain of wearable devices at an early stage, we believe TK are also capable to enter the supply chain of other renowned players. On the other hand, the ramping up of smart wearables (such as smart watches) in the coming 5 years by existing clients will also provide opportunity for TK, as they have already entered their supply chain.
Upstream advantage brought a diversified client base TK was also able to obtain new clients serving as growth driver. We believe due to TK’s advantage in their expertise in mold technology, in which they can provide one-stop total solution service to their mold clients. TK’s existing key clients in plastic components manufacturing are renowned overseas players in their respective industries, like automobiles, household appliances, TMT etc. TK’s competitive cost secures matured relationships (over 5 years) which consistently contribute a significant portion of revenue, such as automobile, TMT and household appliances contributed >50% of Group revenue in FY10-FY13.
M&As to further diversify existing clientele and industry portfolio TK has fully acquired a German company, S&B, in end-August with an aim to expand their gloabal footprint.TK has also completed the acquisition of a Shenzhen company, Nypro Tool, in end October for the expansion of TK’s existing production capacity of mold fabrication segment.TK is also exploring M&A targets in North America where they have the potential to expose themselves to automobile customers in the US.
FY15E 6.9x PE, initiate with BUY to ride on wearable devices
growth We expect TK’s revenue and net profit attributable to shareholders to grow at 20.0% and 32.0% CAGR from FY14E-16E respectively, which is continued to be driven by rapid order growth from consumer electronics, medical devices and automotive segment. TK is trading at FY15E 6.9 x PE (~43% discount to peers. Due to its leading position in their vertically integrated plastic solutions platform, superior gross margin and promising outlook for clients’ products, we believe TK deserves a re-rating. We arrive TK’s TP at HK$2.53, which translates to a 9.6x FY15E PE (~20% discount to peers due to its smaller scale). We initiate TK with BUY rating.
TK Group (Holdings) Limited (2283 HK)
Buckled up for the wearables
Rating Initiate BUY
Target price
HK$2.53
Current price
HK$1.83 Upside.38.3%
Page 2 / 36
Positive 2H14 outlook on rising capacity expansion
TK management expressed strong order flow in its plastic injection segment
(accounted for 56% of revenue in 1H14), after undergoing a flattish 1H14. TK has
made structural adjustment to its customers of plastic components by reducing
sales to customers from the pachinko and game devices industry, while ramping
up the development of the related products including smartphones, wearable
devices and medical devices.
Exhibit 1: Plastic components manufacturing contributed 56% of TK 1H14 revenue
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company, CIRL
In 1H14, revenue from smartphones & wearable devices’ customers surged
101% to HK$112.2mn and accounted for 21.2% of Group revenue (vs 11.8% in
1H13). This has largely offset the decrease in orders from pachinko & digital
devices customers (dropped 26.6% and 39.9% Yoy respectively). However, the
project delay of a consumer electronic’s client (which we believe to be the rollout
of Apple iPhone6) , has led to the drop of machine utilization rate (1H14:56.9% vs
1H13: 58.2%), while GPM for plastic components manufacturing also fell 270 bps
yoy from 22.3% to 19.6% in 1H14. We expect TK’s FY14E revenue and net profit
attributable to shareholders to grow by 23% and 22% to HK$1,479mn and
HK$148mn respectively. The slower bottom line growth is mainly due to higher
effective tax rate (~24.1%) for FY14E.
Exhibit 2: TK’s 1H14 main financial data
Exhibit 1:
Pork
(HKD Mn) 1H13 1H14 Yoy(%)
Revenue 471 529 12.4%
GP 137 135 -1.6%
GPM 29.2% 25.5% -3.7 pts
Operating income 57 68 18.9%
Profit attrbutable to shareholders 39 53 36.8%
Net margin 8.2% 10.0% 2.0ptsproducts
sold in
supermark
et counters
Sources: Company, CIRL
44.0%
56.0%
Mold fabrication (% of revenue) Plastic components (% of revenue)
(HKD Mn) 1H13 1H14 Yoy(%)
Revenue 471 529 12.4%
GP 137 135 -1.6%
GPM 29.2% 25.5% -3.7 pts
Operating income 57 68 18.9%
Profit attrbutable to shareholders 39 53 36.8%
Net margin 8.2% 10.0% 2.0pts
Page 3 / 36
Plastic injection segment: secured substantial orders, peak season drives
up utilization
After undergoing a flattish 1H14 for its plastic injection segment (up 0.9% yoy and
accounted for 56% of revenue), its capacity utilization has been ramping up to
~80% in recent months. We believe TK has secured substantial orders from
Apple, hence will drive both the segment’s and the Group’s GPM in 2H14. As
smartphones & wearable devices are entering their peak season in 4Q14,
together with the well-received market response after the launch of iPhone 6 in
September, we believe downstream demand will keep the utilization rate at >80%
in the remainder of FY14, we expect the segment’s GPM will recover to >21% in
2H14.
Mold fabrication segment: sacrifice short-term margin for long term growth
In the mold fabrication segment, though revenue rose 31.5% to HK$230.2mn in
1H14 (accounted for 43.5% of Group revenue) and utilization rate has been well
kept at ~90%, segment GPM dropped by 810bps to 30.3%. We believe this was
mainly attributable to smaller-sized performance molds for clients in the
consumer electronics industry and medical industry. TK has sacrificed short term
GPM for the mold fabrication segment in 1H14, however, due to their expertise in
mold technology, in which they can provide one-stop total solution service to their
mold clients, we believe this has set a solid foundation for the long term growth of
the downstream business. TK also captures the rapid growth of both the booming
wearable devices as well as the medical devices market. We expect GPM will
pick up in 2H14 mainly driven by higher margin standard mold for automobiles
and electrical appliances.
Exhibit 3: Revenue contribution from consumer electronics and medical segment increased in 1H14
Exhibit 1:
Pork
products
sold in
supermarket
counters
Sources: Generator research, CIRL
26.3% 20.7% 19.9% 20.0% 19.5%
17.4%13.2% 12.8% 13.3% 16.5%
12.4%19.3%
10.5%23.1% 15.8%
3.9%1.5%
9.3%
12.0% 21.2%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
FY10 FY11 FY12 FY13 1H14
Household appliances Commercial telecom equipmentAutomobiles Mobile Phones & wearable devicesPachinko Video gamesDigital devices Medical devicesOthers
Page 4 / 36
Exhibit 4: GPM would be on the uptrend for TK’s plastic components manufacturing segment
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Company, CIRL estimates
Benefit from the growth wearable devices
TK’s early mover advantage in wearable supply chain
Multinational corporations (MNCs) often impose stringent requirements on
product quality and look for business partnerships that can maintain consistent
product quality. Therefore, plastic injection molding manufacturers with advance
technology have a clear advantage because MNCs are willing to offer a higher
price for better and stable product quality. The quality of plastic components
manufactured by plastic injection molding is closely associated with the quality of
plastic injection molds. Given the capacity and technology constraints,
small-scaled manufacturers may be less flexible or adaptive to customers’
changes in design and delivery schedule.
At the early stages of product life cycle, customers may make changes to their
design delivery schedule. They expect manufacturers to be flexible and
responsive to their changes. In addition, the ability to deliver according to
schedule is important to ensuring regular order placing.
With TK has become a major plastic part supplier to Fitbit, we expect orders from
new clients like Jabra, Jawbone and GoPro to ramp up in FY15E, hence driving
the growth of plastic injection segment. We expect wearables to account for
~20% of FY14E and FY15E revenue. By breaking into the supply chain of
wearable devices at an early stage, we believe TK are also capable to enter the
supply chain of other renowned global players.
Year to Dec (HK$ mn) FY12A FY13A FY14E FY15E FY16E
Segment Revene
Mold fabrication 356 476 627 752 902
Plastic components manufacturing 740 722 853 1023 1228
Group 1096 1198 1479 1775 2130
Segment Revenue Growth
Mold fabrication -5.8% 33.6% 31.7% 20.0% 20.0%
Plastic components manufacturing 83.3% -2.4% 18.1% 20.0% 20.0%
Group 40.2% 9.3% 23.5% 20.0% 20.0%
Segment Gross Margin
Mold fabrication 47.5% 39.1% 35.0% 35.0% 35.0%
Plastic components manufacturing 27.4% 20.2% 21.0% 24.0% 24.5%
Group 33.9% 27.7% 26.9% 28.7% 28.9%
Page 5 / 36
As TK have already entered their supply chain and clients would not easily
change their respective mold suppliers to ensure product quality, we believe the
ramping up of smart wearables (such as smart watches) in the coming 5 years
by existing clients such as Apple, Fitbit and Jawbone, will also provide new
opportunities for TK to tab into the smart wearables market.
Wearables still at infancy stage, ramp up on its way
Basic wearable bands are devices serving a specific set of purposes that act as
accessories to smart devices, are designed to be worn on the body, and that
cannot run third-party computing applications. On contrary, smart wearable
bands are multi-purpose devices that serve as accessories to smart devices.
They are capable of running third-party computing applications.
Exhibit 5: Wearable device release date timeline from 2008-2013
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: BI intelligence, CIRL
According to IDC and GSMA intelligence, the worldwide wearable devices
market (include both basic and smart wearables) are expected to grow at 52.4%
CAGR from 14.6mn pieces in 2013 to 120mn pieces by 2018. We believe basic
wearables (such as Fitbit devices, Jawbone UP bracelet and Garmin etc) will
continue to drive the wearables market in the next 2 years as users continue to
embrace their simplicity and low price points (at USD100-USD170).
Page 6 / 36
Exhibit 6: Worldwide wearable devices market to enjoy >30% CAGR from 2013-2018
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Canalys, CIRL
Exhibit 7: Lifestyle and consumer fitness expected to account for 50% wearable market sales
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Generator Research, CIRL
Exhibit 8: Vendor landscape for wearables
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: IHS, CIRL
6.3 630.0
1,260.0
2,520.0
5,166.0
7,140.0
8,862.0
10,920.0
12,642.0
0.0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
14,000.0
2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Mn US$
2013-2018E to grow at 38.0% CAGR
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
2013 2014E 2015E 2016E 2017E 2018E
Total Shipment (mn)
2013-2018E to grow at 52.4% CAGR
46.0%40.0%
15.0%
10.0%
29.0%
35.0%
9.0% 7.0%
1.0% 8.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2014E 2020ELifestyle/entertainment Consumer fitness Components Health care Enterprise
Page 7 / 36
Exhibit 9: GoPro cameras
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: GoPRo, CIRL
Fitbit and Jawbone dominate basic wearable market, more new comers
expected to join the race
Fitbit was the leader in the wristband fitness tracker space in 2013, thanks to the
successful launch of its Flex (basic wristband) and Force (smart device) in May
and October. In 2013, Both Fitbit and Jawbone dominated the basic wearable
market with >70% market share, while Nike's Fuelband devices came in third at
14%.This trend continues in 1Q 2014, as Fitbit and Jawbone have successfully
grown and strengthened their relationships with channel partners internationally
to drive global shipment volumes. On the other hand, Nike’s market share has
further fell to ~10% as it cuts resources in this area and focus of software
development going forward, while new entrant Garmin had a successful launch
of its vivofit device and is chasing the third place.
Exhibit 10: Fitbit and Jawbone dominates the basic wearable market in 2013
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Canalys, CIRL
Fitbit, 58.0%
Jawbone UP, 21.0%
Nike, 14.0%
Others, 8.0%
Page 8 / 36
Exhibit 11: Fitbit announced 3 new fitness bands (namely Charge, Charge HR and Surge) in end October 2014
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Engadget and CIRL
Microsoft (MSFT.US) has also announced in end October that they are
launching a new fitness and health tracker called Microsoft Band for US$199,
along with a new platform called Microsoft Health.The new platform will be able
to collect data from a variety of wearable devices to give users insights into
their personal health. The system will work in conjunction with apps for Windows,
Android and iOS devices. Microsoft says the Band will be available in limited
quantities at its online and physical Microsoft Stores. The device has 10 sensors,
including GPS, optical heart rate monitor, UV light monitor.
Exhibit 12: Microsoft about to launch Microsoft Band together with a new plaform
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Google, CIRL
On the other hand, Lenovo (992.HK) is joining other PC makers such as Asus
and trying to break into the wearables market. It has been reported that Lenovo
accidentally leaked photos of its own wearable smartband (called, Smartband
SW-B100, which is designed as a fitness tracker) earlier in October, which was
being removed from its online product catalogue later on.
Page 9 / 36
According to the product description page, it can record calories burned, steps
taken and a user's heartrate, in addition to syncing with a smartphone through
an app to provide more complete health data. Users can also customize
notifications and reminders on the smartband and use it to unlock a Windows PC
without typing in the password. The smartband can work with Android and iOS
mobile devices.
At the same time, Chinese networking equipment, smartphone vendors and
software giants such as Xiaomi and Qihoo 360 (QIHU.US) have also entered the
market. With increased penetration in mobile Internet access and being more
essential for users, they spot a huge market potential in smart wearable devices.
We foresee that they would also take up a place in this booming industry.
Exhibit 13: Lenovo (992.HK) likely to unveil wearable smartband
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Google, CIRL
Smartwatch shipment to grow at 123% CAGR, Apple and Fibit on their way
According to research by Smartwatch Group, the global smart watch industry
expanded 10 times yoy and reached a global market size of US$ 700mn in 2013.
The industry is expected to grow another 257% to US$ 2.5bn in 2014 but still
only accounted for only 5% the size of the watch industry. This shows that the
wearable device industry (especially for smart watches) is still at its infancy
stage. While IDC forecast that the smart watch shipment will grow at 77.8%
CAGR from 8mn to 45mn pieces in 2014-2017 and will account for ~40-45%% of
total wearable shipment by 2017.
Samsung held a leading position in the smart wearable market with 54% market
in 2013. Though losing to Pebble in 1Q14, Samsung has regained its leading
Page 10 / 36
position in 1H14 with the release of three new products in the 2Q14 including the
Gear 2, Gear 2 Neo and Gear Fit. Samsung also released its fifth smart band in
July 2014, the Gear Live, based on Android Wear (a new Android platform for
wearable devices). While the Pebble Steel helped Pebble keep its momentum
and its app store continues to grow, and Sony still maintain its third place in the
smart wearable market.
The rollout of LG’s G Watch and Samsung’s Gear Live, together with the official
launch of the new platform Android Wear, will be reflected in 3Q14 shipment
tracking report which will be released towards end 2014. While Motorola’s Moto
360 (official launch in October 2014), Apple Watch (announced in September
and expected to launch in early 2015), and Fitbit’s Surge are on their way to the
market.
Exhibit 14: Pebble take over Samsung’s 1st place market share in 1Q14 (right) vs 3
rd place in 2013 (left)
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Canalys, CIRL
More apps on their way to fuel smart wearable growth
Though more and more players are entering the smart wearable market, we
believe limited apps on various platforms might hinder the growth. Compared
with Apple's App Store or Google Play with more than 1mn apps for
smartphones, a shortage of apps has been a major shortfall of many wearable
devices. Some smart watches might have only 15- 20 apps, and they often need
to work over Bluetooth to connect to a nearby smartphone.
The wearable connection to a smartphone or tablet is a way for a manufacturer
to keep the device small and efficient, which reduces the device cost and favors
the use of apps that are easy to maintain and update.
Samsung, 54.0%
Sony, 19.0%
Pebble, 16.0%
Others, 11.0%
Samsung, 23.0%
Sony, 29.0%
Pebble, 35.0%
Others, 13.0%
Page 11 / 36
We believe as more players are tapping into the wearable market, hardware
continue to improve with better designs and user experience (through refining
and improving new platforms like Android Wear and Microsoft Health, battery
technologies that favour longer usage time etc), together with the exploding
number of app developers (~30,000), we see a room for the faster growth of the
smartwatch industry in the coming years. App developers having the potential to
develop apps, which need to break away from the model of extending
smartphone and tablet experiences, and do things that smartphone apps cannot
do.
Exhibit 15: Existing Android smartwatches on Android Wear platform
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Android Wear, CIRL
Exhibit 16: Official launch of Apple Watch in 2015 is expected to fuel the smart wearables market
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Apple, CIRL
Page 12 / 36
Chinese players kicking in at lower ASPs for basic wearables, smart watch
lack of competitive edge in the near term
The smart watch market is quickly gaining more traction as more vendors and
firms are racing to release their products during Q3 and Q4 2014. In addition to
global giants' wearable products, the Chinese networking equipment and
smartphone maker also sees huge market potential in smart wearable devices
as mobile Internet access is increasingly essential for more people, hence are
endeavoring to gain a piece of this fast-emerging industry.
Wearable devices which have been released by domestic manufacturers include
Shanda’s GeakWatch, Qihoo’s 360 Child Guard, T-Watch, inWatch, CWatch.
Xiaomi has also launched a low price basic band, Mi Band (selling at US$13),
while Baidu's Codoon wristbands (selling at US$65) are also already on the
market with ASP at least 30% lower than that of global peers like Fitbit and
Jawbone.
Exhibit 17: Basic wearables released by Xiaomi and Qihoo 360
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Xiaomi, Qihoo 360
Exhibit 18: Smart watches released by Chinese players
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Geak, inWatch
With reference to Sootoo Research, a Chinese IT research company, China's
wearable market grew 301.6% Yoy to RMB2.45bn (~US$ 400mn) in 2013, and it
is expected to reach ~RMB6.62bn (~US$1 billion) and RMB 10.8 bn (~US$ 1.77
billion) in 2014 and 2015 respectively, which represent a growth 170% and 63%.
Page 13 / 36
Of the various types of wearable devices, smart watches possess the largest
market share of 62.8%, followed by smart glasses (11.4%), smart rings (8.1%)
and smart wristbands (7.5%).
Baidu released a report in 2013, in which 93.1% of the interviewees are
familiarized with wearable devices and 70%-75% are willing to purchase one.
Giving no consideration to prices, 49.3% and 6.6% of the customers may
purchase smart bracelets and smart watches respectively, while 19.5% and
29.1% will definitely either one. According to the report, 48.1% of the users hope
wearable devices can help them to keep fit and 37% to overcome laziness and
implement sports plans. The report also added that users are interested in
features such as body-sensing interactions and cross-platform cloud data.
Though cosumers are likely to purchase a smart watch in the future, however,
we belive Chinese brand may not fully benefit, given their similar price points
(~USD250-350) with global branded peers (such as Samung Galaxy Gear, Moto
360 & Apple Watch), and global branded peers continue to enjoy brand equity.
Exhibit 19: Consumers favour wearable to maintain health and implement sports plan
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Baidu, CIRL
7.4 7.4
14.8 14.8 14.8 14.8 18.5
25.9
37.0
48.1
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Promote Taste Facilitate Work
Detecting Health Problems Entertainment
Increase Efficiency Fashion
Social Networking Share Sports Results With Friends
Implement Sports Plan Keep Health
(%)
Page 14 / 36
Exhibit 20: Top 20 smart watch brand ranked by Smartwatch Group
Exhibit 1:
Pork
products
sold in
supermark
et counters
Sources: Smartwatch Group, CIRL
*The ranking is based on a company’s current smartwatch portfolio, sustainable USPs (unique selling points) and brand power, revenue forecasts, the
company’s positioning, strategic approach, and execution power. The ranking is updated on a bi-annual basis.
Company Country Why in Top 20? Ranking
Apple US
Based on good design and intuitive handling, the Apple
Watch will be the first smartwatch to be accepted by the
broad consumer market.
1
Google US
Google specified smartwatch apps with Android Wear,
and has key technologies such as voice recognition and
Google Now.
2
Samsung South Korea
Samsung is the leader in hardware, with integrated
mobile phone technology, acoustics, camera and heart
rate monitoring.
3
Xiaomi China
Xiaomi, the world's fastest growing mobile phone
manufacturer, is introducing wearables with an
aggressive low-cost strategy.
4
Motorola/Lenovo ChinaOne of the first smartwatches which runs on Android
Wear, with a convincing, round design.5
Jawbone USLeader in the measurement and analysis of physiological
parameters, big data approach.6
LG South KoreaLG is one of the most experienced smartwatch
providers, with a solid product offering.7
Yingqu Technology ChinaThe company behind the InWatch is currently the most
dynamic smartwatch company in China.8
Garmin SwitzerlandGarmin offers smartwatches with high product benefits
for various sports disciplines.9
Fitbit USFitbit is the producer of the world's most popular activity
trackers.10
Baidu China
Baidu, Google's counterpart in China, is building a
platform for wearables, and has signed various
partnerships.
11
Intel / Basis Science US
Within its wearable strategy, Intel has acquired Basis
Science, and is building up valuable partnerships based
on its know-how.
12
Pebble US
Pebble's highly successful crowdfunding was one of the
drivers for today's smartwatch boom. Pebble has a solid
hardware and software offering.
13
Limmex Switzerland
Very strong customer benefit (the Limmex watch has
saved many lives so far), and an innovative design
approach.
14
Sony JapanWith various product generations, Sony belongs to the
pioneers in the smartwatch industry.15
Withings FranceThe French company offers an elegant activity tracker
with one year battery life.16
TAG Heuer SwitzerlandBased on valuable showcases, Tag-Heuer is working on
commercial smartwatches in the premium segment.17
Polar FinlandPolar provides some of the finest sports watches, and
integrates more and more smartwatch technologies.18
Adidas Germany
With integrated heart rate monitoring, GPS, and various
other features, Adidas offers one of the best
smartwatches for athletes.
19
Huawei ChinaHuawei has entered the smartwatch space with an
innovative approach, and has a huge distribution power.20
Page 15 / 36
Upstream advantage brought a diversified client base
Molds are the foundation of any industrial process that involves plastic injection
molding, and its core competency is its technical capabilities and expertise in
fabricating high-quality plastic injection molds. TK has been driven to improve its
technical capabilities, craftsmanship and production process in mold design and
fabrication to meet such stringent requirements, as international customers have
stringent requirements regarding the precision.
TK not only fabricates molds but also provides solution service to their mold
clients, which provide an important source of its downstream plastic production.
The synergy of this vertically integrated solution drives the revenue plastic
components manufacturing segment, which also includes revenue generated
from one stop solution, growing at CAGR of 37% from FY10-FY13 higher than
the overall revenue growth at 30%.
Significant synergies exist between these two business units can be reflected by i)
providing customized, cost-effective and streamlined manufacturing services to
its customers, by manufacturing plastic components with the molds fabricated by
its mold fabrication division; ii) two business divisions working together to offer
pre-sales advice and resolve issues that may arise during the production process
needed to refine and modify the molds and iii) cross-selling its products and
services to its respective customers between the two divisions. Given this
upstream advantage TK was also able to obtain new clients serving as growth
driver
Exhibit 21: TK Group’s business model
Source: The Company, CIRL
Mold Fabrication Division
Division
Plastic Components Manufacturing Division
Collaboration
in service
Contract Manufacturers Purchase orders for plastic components
Designers and Producers of Branded Products Purchase orders for molds
Purchase orders for products,
specifying us as supplier for
plastic components
Purchase
orders for
molds
Direct communication
Page 16 / 36
TK’s existing key clients in plastic components manufacturing are renowned
overseas players in their respective industries, which include automobiles (BMW,
Volvo and Mercedes Benz), household appliances (Philips and Electrolux), TMT
(Apple, SanDisk) etc. TK was able to target fast-growing industries, and establish
business relationships with those key players. In many cases, TK has been early
bird in those industries to capture their growth. Hence, TK usually built matured
relationships (over 5 years) with most of key players in high-growth industries,
such as automobile, TMT and household appliances contributed >50% of Group
revenue in FY10-FY13.
We believe TK’s mutually beneficial cooperation with these industry-leading
players earned its credibility and reputation which help building in industry arenas
new to TK. TK achieved stellar growth by dubbing this business over and over
across various consumer products.
M&As to further diversify existing clientele and industry portfolio
TK has fully acquired a German company, S&B, for EUR 250K in end-August and
completed in September, with an aim to expand their global footprint. S&B is
primarily engaged in: (i) the design and fabrication of plastic injection molds and
(ii) the mechanical design and manufacturing of plastic components employing
the plastic injection molds it fabricates.
TK identified the target market in Germany as it is considered to be a European
country with the most business potential and S&B are regarded as an acquisition
target with strong fit to TK’s existing business with a strong history in operating
distribution of tools and special machines for injection molding as well as mold
fabrication. We expect that the sales and marketing capabilities of the Group in
the European region will be substantially enhanced through the sharing of
synergies with S&B, as S&B will be able to provide local on-the-ground
after-sales services to current and potential German and European customers,
which include automobile (such as Volkswagen) and medical customers.
TK has also completed the acquisition a Shenzhen company, Nypro Tool, for
RMB 9.6mn (~HK$12.0mn) on October 31, 2014. The purpose of the acquisition
is for the expansion of TK’s existing production capacity of mold fabrication
segment.TK is also exploring other M&A targets in North America where they
have the potential to expose themselves to automobile customers in the United
States.
Page 17 / 36
Financial analysis and valuation
Growth momentum of TK’s revenue is expected to continue
TK Group achieved 16.8% and 64.1% CAGR in mold fabrication and plastic
components manufacturing segments during FY10-12 respectively, well exceeds
the industry growth rate of 12.7% and 18.7% in this period, demonstrated TK
Group’s capability in gaining market share.
Momentum of mold fabrication segment continued in 1H14 and recorded 31.5%
yoy sales growth. However, revenue from plastic components only posted a
slight increase of 0.9%, mainly due to structural adjustment to its customers of
plastic components by reducing sales to customers from the pachinko and game
devices industry. For instance, the largest customer of TK Group in 2011 and
2012, which is a contract manufacturer of a prominent Japanese video game
device designer, was not one of its top ten customers in 1H13. We expect sales
of plastic components to improve in 2H14, as the increase in upstream mold
orders in 1H14 would gradually convert into demand on downstream plastic
components.
We also predict TK Group to achieve 31.7%/18.1% CAGR for its mold/plastic
component products in FY14-15E, supported by 1) the expected industry growth
rate of 9.9% and 15.0% during the period according to Ipsos, 2) TK Group’s
proven track records in winning market share in the highly fragmented market. 3)
Rapid growth of the booming wearable devices market.
A medium term GPM of 37.0%/27.5% for mold/plastic component segment
There was notable fluctuation in TK Group’s GPM during FY10-12 and 1H13,
mainly because it has a wide product range and its GPM varied from project to
project. TK Group has various target margin level for different projects,
depending on factors such as technical complexity, market competition, customer
relationship, business potential with the customer etc. Leverage on its technical
capabilities and expertise in fabricating high-quality plastic injection molds, we
believe a GPM of 35-37.0% and 27-28% is sustainable in medium term for its
mold and plastic component segments.
Page 18 / 36
Stable selling and administrative expenses; lower effective tax rate
expected in FY15E
TK Group recorded a relatively higher selling expense to sales ratio of 5.9% in
FY11, primarily due to an increase in commission expenses paid to the
third-party contract sales representative. The ratio was relatively stable at
4.7-5.1% in FY10, FY12 and FY13. Besides, excluding the non-recurring listing
expenses, administrative expenses to sales ratio is declined from 14.5% in FY11
to 13.0% and 10.5% in FY12-13, thanks to economic of scale. We expect a
relatively stable selling and admin to sales ratio for TK Group going forward.
For tax rate, as the subsidiary enjoying tax benefits for being a “New and High
Technology Enterprise” will not continue to be a part of TK Group after the
Reorganization, we expect an increase in effective tax rate in FY14E (~21% vs
FY13 :16.0%). However, TK may be able to get the profit tax benefit from Hi tech
manufacturing company for TK Mold (Shenzhen), an indirect wholly-owned
subsidiary of TK. TK may enjoy a lower effective tax rate at ~17.0% in FY15E.
Exhibit 22: Key assumptions
Income statement
Year to Dec (HKD mn) FY11A FY12A FY13 FY14E FY15E FY16E
Total revenue 782 1,096 1,198 1,479 1,775 2,130
- Mold fabrication 378 356 476 627 752 902
- Plastic components 403 740 722 853 1,023 1,228
Gross Profit (reported) 280 372 332 398 509 617
- Mold fabrication 126 169 186 219 263 316
- Plastic components 154 202 146 179 246 301
SG&A -159 -198 -182 -225 -270 -324
Other Income 9 24 30 29 34 40
Finance costs -9 -11 -6 -8 -10 -12
Profit before tax 120 186 173 194 263 322
Tax expenses -36 -51 -48 -47 -66 -80
Net profit 84 135 125 147 197 241
Ratio
Year to Dec FY11A FY12A FY13 FY14E FY15E FY16E
Growth rate
Revenue 45.8% 40.2% 9.3% 23.5% 20.0% 20.0%
- Mold fabrication 44.8% -5.8% 33.6% 31.7% 20.0% 20.0%
- Plastic components 46.8% 83.3% -2.4% 18.1% 20.0% 20.0%
Gross profit 75.7% 32.8% -10.7% 20.0% 27.7% 21.2%
Net profit 87.9% 60.0% -7.7% 18.2% 33.8% 22.3%
Margins
Gross margin 35.8% 33.9% 27.7% 26.9% 28.7% 28.9%
- Mold fabrication 33.2% 47.5% 39.1% 35.0% 35.0% 35.0%
- Plastic components 38.2% 27.4% 20.2% 21.0% 24.0% 24.5%
Effective tax rate 29.8% 27.4% 27.7% 24.1% 25.0% 25.0%
Net margin 10.8% 12.3% 10.4% 10.0% 11.1% 11.3%
Source: The Company, CIRL estimates
Page 19 / 36
Attractive FY15E 6.9x PE, Initiate with BUY to ride on robust growth of
wearable devices
We believe TK has the leading position in their vertically integrated plastic
solutions platform. As demand for plastic replacing metal is growing, and TK has
established matured relationship with leaders in various industries, we believe TK
will enjoy a promising outlook.
We expect TK’s revenue and net profit attributable to shareholders to grow at
20.0% and 27.6% CAGR from FY14E-16E respectively, which is continued to
driven by rapid order growth from consumer electronics, medical devices and
automotive segment. TK is trading at FY15E 6.9x PE (~43% discount to peers).
Due to its leading position in their vertically integrated plastic solutions platform,
superior gross margin and promising outlook for clients’ products, we believe TK
deserves a re-rating. We arrive TK’s TP at HK$2.53, which translates to a 9.6x
FY15E PE (~20% discount to peers due to its smaller scale). We initiate TK with
BUY rating.
Exhibit 23: Peers comparison
Mkt Cap Price Yield (%)
(HKD mn) (HKD) 1M 3M YTD FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E
HK listed tech components
AAC TECHNOLOGIES 2018 HK 53,357 43.45 (0.8) (8.0) 15.4 16.4 16.4 17.2 13.9 1.5% 2.1% 2.3% 2.7%
FIH MOBILE LTD 2038 HK 31,654 4.07 2.5 (7.7) (2.4) 50.5 50.5 23.4 16.6 0.0% 0.0% 0.0% 0.0%
BYD ELECTRONIC 285 HK 21,360 9.48 (2.8) 46.5 110.2 25.9 25.9 14.8 11.8 0.0% 0.3% 0.7% 1.1%
SUNNY OPTICAL 2382 HK 15,051 13.72 16.7 46.0 82.0 24.5 24.5 20.0 15.6 1.0% 1.1% 1.4% 1.8%
TRULY INTL HLDGS 732 HK 10,989 3.78 (6.9) (14.7) (9.4) 6.6 6.6 6.8 5.7 2.2% 5.8% 4.7% 5.8%TCL COMM TECH HL 2618 HK 9,732 7.98 3.6 (23.4) 0.8 29.0 29.0 8.7 7.2 0.5% 0.6% 3.9% 4.9%COOLPAD 2369 HK 7,041 1.64 28.1 (9.9) 29.1 19.8 19.8 9.5 8.8 1.0% 1.2% 1.7% 2.1%TONGDA GROUP HLD 698 HK 5,688 1.04 1.0 (12.6) 100.0 13.9 13.9 11.8 9.1 2.1% 2.2% 2.6% 3.5%JU TENG INTL HDG 3336 HK 4,760 4.02 (17.1) (21.6) (21.6) 6.1 6.1 5.9 5.0 2.1% 3.4% 4.0% 4.6%SAS DRAGON HLDG 1184 HK 1,367 2.19 (16.4) (16.4) 21.3 6.7 6.7 - - 0.0% 0.0% 0.0% 0.0%PANASIALUM HOLDI 2078 HK 1,236 1.03 (12.0) (14.2) (29.5) 5.4 5.4 6.1 6.4 21.4% 4.6% 1.7% 1.6%SCUD GROUP LTD 1399 HK 1,176 1.14 2.7 (13.0) 135.1 24.4 24.4 8.6 5.9 0.0% 0.0% 2.5% 3.6%SIM TECH GROUP 2000 HK 1,151 0.45 4.7 8.4 36.4 -4.8 -4.8 - - 0.0% 0.0% 0.0% 0.0%KA SHUI INTL HLD 822 HK 1,001 1.12 16.7 3.7 (53.3) 16.5 16.5 - - 7.9% 9.8% 0.0% 0.0%
Average 23,691 2.1 6.4 32.8 18.9 18.9 12.1 9.7 4.4% 3.1% 2.5% 3.2%
TK GROUP HOLDING 2283 HK 1,513 1.83 13.7 83.0 59.1 - 8.4 9.8 6.9 0.0% 1.5% 3.1% 4.3%
Precision mold peers
MELROSE INDUSTRI MRO LN 34,615 32.30 9.7 (2.1) (13.8) 64.1 6.0 16.9 15.0 2.5% 3.2% 3.1% 3.3%
MISUMI GROUP INC 9962 JP 22,215 243.47 22.9 13.4 9.8 23.5 23.5 24.7 20.6 0.9% 0.8% 1.0% 1.1%
SANKO GOSEI LTD 7888 JP 470 22.27 (4.9) 7.4 15.7 6.7 2.7 - - 0.0% 0.0% 0.0% 0.0%
SKP RESOURCES BH SKP MK 1,535 1.71 14.8 25.6 137.1 16.4 14.6 23.4 15.1 3.0% 3.6% 1.8% 3.7%
SHENZHEN CHANG-A 300151 CH 3,971 19.75 (16.4) 6.4 83.9 94.5 89.5 - - 0.0% 0.0% 0.0% 0.0%
HI-P INTL LTD HIP SP 3,117 3.81 (1.6) (11.8) 8.5 28.9 78.8 63.5 15.9 1.9% 2.6% 3.1% 6.3%
NN INC NNBR US 3,240 170.90 (2.1) (21.7) 9.2 15.4 22.0 16.2 9.7 0.0% 0.0% 0.0% 0.0%
EVA PRECISION 838 HK 3,328 1.98 6.5 10.6 81.7 48.3 60.0 14.7 11.4 0.8% 0.6% 2.0% 2.6%
CW GROUP HOLD 1322 HK 1,664 2.70 (1.8) 13.9 52.5 28.2 12.8 - - 0.0% 0.0% 1.1% 1.9%
HAITIAN INTL 1882 HK 26,334 16.50 (6.3) (12.5) (5.8) 21.6 17.2 15.7 13.5 1.5% 2.1% 2.1% 2.5%
LUNG KEE HLDG 255 HK 1,497 2.37 1.7 (12.2) (12.2) 7.6 10.3 - - 0.0% 0.0% 0.0% 0.0%
Average 6,737 1.3 1.9 33.3 32.3 30.7 25.0 14.5 1.8% 2.2% 2.0% 3.1%
TK GROUP HOLDING 2283 HK 1,513 1.83 13.7 83.0 59.1 - 8.4 9.8 6.9 0.0% 1.5% 3.1% 4.3%
PER (x)
Source: Bloomberg, CIRL
Page 20 / 36
Exhibit 10: TK Group 12 month forward P/E Ratio
Exhibit 1:
Pork
products
sold in
supermark
et counters
Source: Bloomberg, CIRL
Exhibit 10: TK Group 12 month forward P/B Ratio
Exhibit 1:
Pork
products
sold in
supermark
et counters
Source: Bloomberg, CIRL
0
2
4
6
8
10
12
Dec-13 Mar-14 Jun-14 Sep-14
avg.-1std.
12 mths Forward P/E Ratio
+1std.
a
- -1std.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Dec-13 Jun-14
12 mths Forward P/B Ratio
+1std.
-1std.
avg.
-1std.
Page 21 / 36
Exhibit 24: Financial forecast
Income statement Cash flow
Year to Dec (HKD mn) FY10A FY11A FY12A FY13A FY14E FY15E FY16E Year to Dec (HKD mn) FY11A FY12A FY13A FY14E FY15E FY16E
Revenue 536 782 1,096 1,198 1,479 1,775 2,130 Pre-tax profit 120 186 169 195 263 322
Gross profit (reported) 159 280 372 332 398 509 617 Taxes paid -36 -51 -48 -41 -45 -55
EBITDA 88 173 242 227 265 345 419 Depreciation 45 47 52 64 74 86
Depreciation -24 -45 -47 -52 -64 -74 -86 Associates 0 0 0 0 0 0
EBIT 64 128 195 175 201 271 333 CFO bef. WC change 130 182 174 218 293 353
Net interest income (exp.) -2 -7 -9 -6 -6 -8 -12 Change in working cap 21 11 -24 -14 -54 -21
Associates 0 0 0 0 0 0 0 Cashflow from operation 151 193 149 204 239 332
Exceptionals/others 0 0 0 0 0 0 0 CAPEX -163 -159 39 -102 -102 -102
Profit before tax 61 120 186 169 195 263 322 Free cash flow -13 34 188 102 137 230
Tax expenses -16 -36 -51 -48 -41 -45 -55 Dividends -31 -55 -77 -46 -66 -80
Minority interest 0 0 0 0 0 0 1 Balance sheet adj. 39 37 125 -33 156 -12
Net profit 45 84 135 121 154 218 267 Shares issued 0 0 0 0 0 0
Dividends -37 -31 -55 -77 -46 -66 -80 Others 0 0 0 0 0 0
Net cash flow -4 16 236 23 227 138
Balance sheet Net cash (debt) start -84 -88 -73 163 186 413
Year to Dec (HKD mn) FY10A FY11A FY12A FY13A FY14E FY15E FY16E Net cash (debt) at year-end -88 -73 163 186 413 551
Cash & equiv 41 158 142 333 322 556 695
Trade receivables 131 158 201 229 282 339 407 Ratios
Other receivables 61 143 137 0 0 0 0 Year to Dec FY11A FY12A FY13A FY14E FY15E FY16E
Inventories 118 94 150 184 230 269 321 Growth rate (%)
Other current assets 0 8 25 0 0 0 0 Revenue 45.8 40.2 9.3 23.5 20.0 20.0
Fixed assets 172 191 279 167 208 238 259 EBITDA 96.2 40.0 (6.0) 16.5 30.2 21.6
Intangible assets 2 5 4 4 3 3 2 EBIT 100.6 52.9 (10.3) 14.6 34.9 23.1
Investment, associates etc 14 14 13 39 70 55 63 Net profit 87.9 60.0 (10.2) 26.6 42.2 22.3
Total assets 539 770 951 955 1,116 1,317 1,603 Fully diluted EPS 87.9 60.2% -19.9% -14.7% 42.2% 22.3%
Margins (%)
Account payables 208 232 342 379 465 507 605 Gross margin (reported) 35.8 33.9 27.7 26.9 28.7 28.9
Other payables 49 55 63 1 1 1 1 EBITDA 22.1 22.1 19.0 17.9 19.4 19.7
Short-term debt 73 196 162 116 85 91 91 EBIT 16.3 17.8 14.6 13.6 15.3 15.7
Other current liabs 17 27 38 31 31 31 31 Net margin 10.8 12.3 10.1 10.4 12.3 12.5
Long-term debts 52 50 52 53 52 52 52 Other ratios
Deferred tax and others 5 10 18 5 5 5 5 ROE (%) 42.7 48.9 32.8 32.2 34.6 32.7
Other long-term liabs 0 2 0 0 0 0 0 ROA (%) 11.0 14.2 12.7 13.8 16.6 16.7
Total liabilities 403 572 675 585 638 686 786 Net gearing (%) 44.5 26.2 (44.1) (38.9) (65.5) (67.4)
Interest coverage (x) 17.3 21.7 29.4 32.4 35.6 28.9
Share capital 0 0 0 0 0 0 0 Receivables days 73.7 66.8 69.7 69.7 69.7 69.7
Reserves 136 198 276 370 478 631 818 Payables days 168.5 172.2 159.8 157.0 146.0 146.0
Shareholders' equity 136 198 276 370 478 631 818 Inventory days 68.0 75.7 77.5 77.5 77.5 77.5
Minorities 0 0 0 0 0 0 0 Effective tax rate (%) 29.8 27.4 28.3 21.0 17.0 17.0
Total equity 136 198 276 370 478 631 818
Net cash (debt) -84 -88 -73 163 186 413 551
Source: Company data, CIRL
Risk Factors
Downside risks include: 1) Revenue is highly dependent on a relatively small
number of customers; 2) Plastic production orders are short-term,
contractor/customer may switch supplier; 3) Lack of choice in raw material supply;
4) Competition from oversea players; 5) more-than-expected competition; and 6)
rapidly changing technology trends, customers no longer lead in their respective
industry.
Page 22 / 36
Company background
TK Group (Holdings) Limited (TK Group) is a leading provider of one-stop total
plastics solutions in the PRC, primarily engaged in: 1) the design and fabrication
of plastic injection molds and 2) the mechanical design and manufacturing of
plastic components. According to Ipsos, an independent market research
company, it ranked 2rd
in the PRC in terms of revenue generated from fabricating
plastic injection molds in 2012. The two business divisions work together to
provide one-stop total plastics solutions.
Exhibit 25: TK Group’s business model
Source: The Company, CIRL
Fabrication of plastic injection mold
TK Group fabricates plastic injection molds, which must be specifically
engineered and fabricated with cavities to shape the plastic components in
accordance with the desired design, features and specifications. According to
Ipsos, molds with MT3 precision level or above can be further classified into
performance molds and standard molds. And TK have the technical capabilities
to fabricate molds that meet the MT1 precision level, which is the highest
precision level in the national standard (“National Standard of the People’s
Republic of China GB/T14486-2008 — Dimensional Tolerances for Moulded
Plastic Parts”).
Performance molds: They are smaller in size, have a higher number of
cavities, involve a less complex structural design and are used in shorter
production cycles in the plastic components manufacturing process. Its
performance molds are generally utilized in connection with the
high-volume manufacturing of identical plastic components of various
products, including consumer electronic products such as USB drives and
smart phones accessories, and medical products such as disposable
syringes.
Mold Fabrication Division
Division
Plastic Components Manufacturing Division
Collaboration
in service
Contract Manufacturers Purchase orders for plastic components
Designers and Producers of Branded Products Purchase orders for molds
Purchase orders for products,
specifying us as supplier for
plastic components
Purchase
orders for
molds
Direct communication
Page 23 / 36
Standard Molds: They are larger in size, have a lower number of cavities,
involve a more complex structural design and consist of a higher number of
components per mold. Its standard molds are utilized in connection with the
manufacturing of plastic components of various products, including
automotive parts such as door panels, glove boxes and grills,
telecommunication equipment such as teleconference phone terminals, and
home appliances such as washing machines and refrigerators.
Exhibit 26: Performance molds (left) and standard Molds (right)
Source: The Company, CIRL
Manufacturing of plastic components
TK also manufactures plastic components for various products by utilizing the
plastic injection molding process. It also manufactures plastic components by
employing special decorative molding processes, including in-mold-labeling,
double-shot injection molding and rapid heat cycle molding, which are
modifications to the typical plastic injection molding process designed to achieve
certain desired visual and quality effects.
Plastic components manufactured by employing performance molds:
Performs certain secondary processing (spray-painting, printing, hot
stamping, ultrasonic welding and assembly of plastic components) on the
plastic components subsequent to the plastic injection molding process in
accordance with the customers’ requirements. Generally entails the mass
production of identical plastic components, in devices such as USB drives
and smart phones.
Plastic components manufactured by employing standard molds:
Generally have a higher degree of complexity, involve a more complex
process and entail more secondary processing procedures. Products
include special gaming machines such as pachinko machines and
telecommunication equipment such as teleconference phone terminals.
Page 24 / 36
Plastic components manufactured by special decorative molding
processes: Special decorative molding entails various modifications to the
typical plastic injection molding process to achieve certain desired visual
and quality effects. Products include plastic components of consumer
electronic products such as the casing of video game devices, and mobile
communication devices such as smart phones. It employs the following
special decorative molding techniques to enhance the visual appeal of
certain plastic components:
In-Mold Labelling (IML): IML techniques allow for the desired
patterns and logos to be embedded as part of the plastic components.
IML is achieved by placing a film printed with the desired pattern or
logo into the plastic injection mold, thereby enabling the pattern or
logo to be imprinted simultaneously in the plastic injection molding
process. Patterns and logos appearing in plastic components
manufactured using IML techniques generally have greater wear
resistance and are more colourful than patterns and logos that are
spray-painted onto the surface of the plastic components.
Double-Shot Injection Molding: Double shot injection molding uses
plastic resins of two different colours or two different types of plastic
resins in the same plastic injection molding process, thereby
enhancing the variety of visual effect options.
Rapid Heat Cycle Molding (RHCM): RHCM is a relatively new plastic
injection molding technique that involves the rapid heating and cooling
of the mold. This process may result in plastic components with better
visual effects than traditional plastic injection molding, and is generally
used to produce plastic components with glossy or silky surfaces.
Exhibit 27: Plastic components by performance molds(left), standard molds(mid) and special decorative molding processes(right)
Source: The Company, CIRL
Page 25 / 36
Diversified customers
TK’s customer base is a large and diverse. Its customers, as well as its own
plastic components manufacturing division, uses its plastic injection molds to
manufacture plastic components for products in a wide range of industries, such
as commercial telecommunication equipment, automotive, household electrical
appliances, video game devices, digital devices, mobile phone, wearable devices
pachinko and medical devices
Mold fabrication customers: The customers of its mold fabrication include
manufacturers in its various downstream industries that only engage it for mold
fabrication, and producers and designers of branded products and its contract
manufacturers.
Plastic components manufacturing customers: The customers of its plastic
components manufacturing include contract manufacturers of certain leading
global brands such as Polycom, Nitendo, Apple and SanDisk. These contract
manufacturers use the plastic components it supplies in their respective
downstream manufacturing operations.
Page 26 / 36
A leading provider of one-stop total plastics
solutions
High entry barrier in mold fabrication
Mold is threshold of the plastic component production. Precision of the molds is
critical to meeting the clients’ increasing complicated requirements on end
products. Durability and optimized design translate in to productivity. By
mastering both, the group has established a leading position in the industry. The
group ranked the second in terms of revenue from fabricating plastic injection
molds in the PRC in 2012.
Advanced technical expertise in the design and fabrication of plastic
injection molds
Molds are the foundation of any industrial process that involves plastic injection
molding, and its core competency is its technical capabilities and expertise in
fabricating high-quality plastic injection molds. As at 30 June 2013, 204 of its
mold fabrication employees had at least five years of industry experience and 94
of its mold fabrication employees had earned a bachelor’s degree or above.
And it has been driven to improve its technical capabilities, craftsmanship and
production process in mold design and fabrication to meet such stringent
requirements, as international customers have stringent requirements regarding
the precision, reliability, tooling-life and quality of the molds it supply. It has
received a “Tool Design Award – Gold Award” from the Hong Kong Mold & Die
Council of Federation of Hong Kong Industry in 2010.
Due to their leading position in mold fabrication, TK enjoy a high GPM in mold
fabrication segment of over 30% from FY10-FY13. To further enhance their
leading position in the molds for larger products, TK has already setup a new
facility for the fabrication of large molds and began operation in 3Q14, and order
pipeline area already full for 2H14 and these mainly came from automobile
clients .
Vertically integrated solutions platform drive growth in plastic components
The group not only fabricates molds but also provides solution service to their
mold clients, which provide an important source of its downstream plastic
production. The synergy of this vertically integrated solution drives the revenue
plastic components manufacturing segment, which also includes revenue
generated from one stop solution, growing at CAGR of 64% from 2010 to 2012
higher than the overall revenue growth at 43%.
Page 27 / 36
Exhibit 28: TK Group’s revenue breakdown FY 2010-2012
Source: The Company, CIRL
As a vertically integrated provider of one-stop total plastics solutions, it provides,
among others, mold design and fabrication services as well as plastic
components mechanical design and manufacturing services. Significant
synergies exist between its mold fabrication operations and plastic injection
molding operations, reflected by the fact that generally,
Provides customized, cost-effective and streamlined manufacturing
services to its customers, by manufacturing plastic components with the
molds fabricated by its mold fabrication division.
The business units from its two divisions also work together to offer
pre-sales advice and resolve issues that may arise during the production
process. For example, its plastic components manufacturing division has
the capability to test the plastic injection molds that it fabricates, which
enhances its efficiency and accuracy in obtaining raw technical data
needed to refine and modify the molds. It uploads such raw technical data
to its knowledge management system, which provides it with a reliable and
useful technical information database to help it resolve production issues as
well as further improve its production capabilities.
The two divisions can cross-sell its products and services to its respective
customers.
There is no HK listed competitor with comparable comprehensive portfolio in both
molds and plastic products.
Page 28 / 36
Exhibit 29: Plastic components by performance molds, standard molds and special decorative molding processes
TK Eva Precision (00838.HK) Tongda (00698.HK)
Upstream Plastic injection molds (standard
molds, perfornance/precision
molds)
Metal stamping molds, plastic
injection molds
(perfornance/precision molds)
Nor for sale
Downstream Plastic components for
automobile, household
appliances, USB drives, mobile
etc.
Metal/plastic components for
office automation equipment,
automobile, consumer
electronics etc.
Plastic/metal
casings/components for
handsets, home appliances and
notebooks.2nd
fabricating plastic injection
molds producer in China by
revenue (2012)
One of the leading players in
office automation equipment
mould and component market
A renowned manufacturer of
plastic casings for handsets,
home appliances and notebooks,
with patented technology for in-
mould lamination (IML)
technology in ChinaExperienced in mold fabricarion,
Key clients are major player
oversea
Capablity in producing high
precision moulds. World-class
customers such as Canon, Fuji
Xerox, Toshiba etc.
A leader in IML technology in
China specializing in electronic
appliances. Strong clientele base
includes Lenovo, HP, Dell,
Nokia, Huawei, ZTE etc.The continuous growth of
automobile, household appliance
and smartphone and wearable
devices demand. Expansion in
medical device.
Strong order
flow from its domestic customers
in the handset segment
Riding on the huge wave of
smartphone demand in China,
along with continuous market
share gains of its key customers
– Huawei, Lenovo and ZTE
25.6% 27% 23% (overall)
Company
Gross margin
(plastic products 1H14)
Growth driver
Competitive edge
Market position
Product
Source: The Company, CIRL
Diversified client base sustains a balanced portfolio in plastic components
manufacturing
TK has been able to establish its current market position by strategically building
long-term relationships with internationally-recognized industry-leading players
such as ABB, Electrolux, Whirlpool, Promens, Polycom, Sandisk, Apple and
major German players in automobile industry.
TK was able to target fast-growing industries, and establish business
relationships with those key players. In many cases, TK has been early bird in
those industries to capture their growth. Hence, TK usually built matured
relationships (over 5 years) with most of key players in high-growth industries,
which in turn contribute significant and stable portion of revenue.
We believe its mutually beneficial cooperation with these industry-leading players
earned its credibility and reputation which help building in industry arenas new to
TK. TK achieved stellar growth by dubbing this business over and over across
various consumer products.
Page 29 / 36
Also, the company was also able to identify new clients serving as growth driver.
For instance, a prominent Japanese video game device designer, Nitendo, which
contributed as their largest customer by sales volume for 2011 and 2012,
representing 15.1% and 14.0% of their annual revenue respectively. However,
TK did not have a business relationship the company before 2011.
Utilizing proximity advantage
TK’s operates four production bases, three of which are located in Shenzhen,
Guangdong Province, the PRC, and one in Suzhou, Jiangsu Province, the PRC.
The Shenzhen Tangjia Plant conducts all of its mold fabrication operations. Its
other plastic components manufacturing operations is conducted at the
Shenzhen Yulu Plant A and the Shenzhen Yulu Plant B, and Jiangsu Suzhou
Plant.
The company was able to introduce several suppliers in their mold fabrication
process into the park, creating their own supply chain in proximity. Also, TK is
planning to expand their facilities in Suzhou, extend their reach in the industrial
cluster in Yangtze River Delta.
Extensive capacity expansion on the way
In FY12, the overall utilization rate for mold fabrication and plastic components
manufacturing has reached 88% and 86% respectively. To sustain a continuous
growth, TK plans to construct new facility and purchase new equipments starting
2014. Driving their estimated up-coming CAPEX to HK$100-120 mn compares to
HK$81 mn, HK$64 mn and HK$146 mn in 2010-2012.
Exhibit 30: Production Capacity and Utilisation Rate
Source: The Company, CIRL
FY10 FY11 FY12 FY13 1H14
Production - Mold fabrication
No. of key mold fabrication machines 94 105 110 120 119
Estimated annual production capacity (hrs) 631,680 705,600 739,200 792,960 386,400
Actual annual machine production time (hours) 585,535 563,690 652,837 735,940 351,677
Average utilisation rate 92.7% 79.9% 88.3% 92.8% 91.0%
Production - Plastic components manufacturing
No. of key mold fabrication machines 108 133 164 191 189
Estimated annual production capacity (hrs) 741,312 912,912 1,125,696 1,307,592 648,648
Actual annual machine production time (hours) 511,686 594,775 972,753 850,113 368,932
Average utilisation rate 69.0% 65.2% 86.4% 65.0% 56.9%
Page 30 / 36
Industry overview
The plastic injection molding industry requires high precision and
investment capital
Plastic injection molds is the foundation of the plastic component production,
which must be specifically engineered and fabricated in accordance with the
desired design, features and specifications. Precision of the molds is critical to
meeting the clients’ increasing complicated requirements on end products.
Durability and optimized design translate in to productivity.
China is the third largest countries in plastic injection molds and
components production
United States and Germany are the top two countries for global outputs of plastic
injection molds and plastic components manufactured utilizing the plastic
injection molding process. Both countries accounted for around 60% of the
production output value.
In recent years, however, due to cheaper labour costs in the PRC, there is an
emerging trend of foreign enterprises relocating manufacturing bases and
increasing investment capital in the PRC plastic injection mold fabrication and
plastic injection molding industry segments. China accounted for 22% and 28%
of the global outputs of plastic injection molds and plastic components in 2012.
China plastic injection molding market grow at comparable pace
In 2012, plastic injection molds accounted for approximately 50.0% of the plastic
mold market in the PRC as injection molds are necessary for plastic injection
molding, and plastic injection molding is the most common method of plastic
components manufacturing. Currently, plastic injection molding has been widely
applied in industries such as transportation, packaging, telecommunications,
construction, household appliances, automotives, computers, aerospace, and
military sectors.
China plastic injection molding market enjoyed fast growth of CAGR 11.6%
during 2008-2012 and the production output value reached Rmb25.4b in 2012.
This growth rate outperformed the global market growth at 6.0% during the same
period. This was attributed to the improvement of technology and manufacturing
process, which have led to more global corporations choosing Chinese plastic
injection molding providers. The overall plastic injection molding market is
expected to post a growth rate of CAGR around 10.0% from 2013-2015 to reach
RMB 33.7 bn.
Page 31 / 36
During 2010-2012, China’s production value of plastic products manufactured by
plastic injection molding grew from RMB368.1 billion to RMB518.9 billion, at a
CAGR of approximately 18.7%. It is expected that the production value will record
a CAGR of around 15.0% from 2013-2015.
Exhibit 31: Performance molds (left) and standard Molds (right)
Source: National Bureau of Statistics,Ipsos, CIRL
The growth in the production output value of both segments are mainly
attributable to the strong growth of domestic demand driven by (i) the anticipated
recovery of the global economy; and (ii) the PRC government’s policy aiming at
upgrading and improving product quality and production technology of the plastic
mold industry, as set out in the Twelfth Five-Year Plan
Exhibit 32: Forecasts of China injection molding and high precision plastic products output value (2013-2017)
Source: National Bureau of Statistics,Ipsos, CIRL
Multiple potential growth drivers ahead
Demand for plastic injection molds and plastic components manufactured by
plastic injection derive from downstream products, such as the household
electrical appliances, automotives, telecommunication and medical products. As
product life cycle becomes shorter, there is an increasing demand for molds with
higher precision and dimensional accuracies to eliminate the need for fine-tuning
products that would otherwise be required if a low quality mold is used.
10131102
1410
1700
1853
253 281 368 468
519
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2008 2009 2010 2011 2012
Global production output value
RMB Bn
27.930.7
33.7
37.1
40.8
10
15
20
25
30
35
40
45
2013E 2014E 2015E 2016E 2017E
China
RMB Bn
597 686
789
908
1,044
0
200
400
600
800
1000
1200
2013E 2014E 2015E 2016E 2017E
China(High-precision plastic injection molding products)
RMB Bn
Page 32 / 36
Customers of plastic injection molds and plastic components manufactured by
plastic injection molding are mainly original equipment manufacturers (OEM),
original design manufacturers (ODM) and original brand manufacturers (OBM)
within these industries. Therefore, if the downstream industries are growing
rapidly, it will significantly increase the demand for the plastic injection molds and
plastic components manufactured by plastic injection molding.
Below set forth the industries that may contribute to the growth of the plastic
injection molds and plastic components:
Household electrical appliances: The demand for plastics in the
household electrical appliances sector is over one million tonnes each year.
The use of plastics is expected to continue to expand in the field of
household electrical appliances, as plastic components are able to
substitute metal components in the production of household electrical
appliances due to the improvement of materials and production
technologies.
Automotives: The plastic consumption volume in the automotive industry
accounted for approximately 8%-10% of the total consumption volume of
plastics in the PRC in 2012. As automotive development is moving towards
lightweight, energy-saving and environmentally friendly vehicles, plastic
materials are expected to be more widely used for the manufacturing of
automotive parts.
Mobile phones: With the increasing penetration of 3G in China as well as
the potential rollout of 4G, it is expected that there is still potential upside in
smart phone penetration in China going forward, and mobile phone
manufacturers see a sizable opportunity in this territory. Mobile phone
manufacturers are keen on improving the color, texture and features of
mobile phones, as Chinese consumers’ increased demand for high quality
and sophisticated mobile phones. These in turn increase the demand for
plastic injection molds and plastic components manufactured by plastic
injection molding.
Medical devices: In 2012, approximately 75.0% of the total plastic medical
devices (include medical containers, surgery equipment as well as testing
and detection instruments etc) produced in the PRC involved plastic
components manufactured by plastic injection molding. According to the
Ipsos Report, in 2012, 40% of the domestic demand for performance plastic
injection molds was met by imports, which reflects that the PRC mold
manufactures did not satisfy the domestic demand for performance plastic
molds due to equipment and mechanical capacity constraints. The medical
devices industry is expected to grow at a CAGR of over 20% for the next
5-10 years, due to increasing medical consumption from the aging
population and an increase in the income level of the PRC residents.
Page 33 / 36
Video game devices: According to the Ipsos Report, the production value
in the PRC (in terms of processing trade) of video game devices grew by
32.3% to RMB50.0 billion in 2012. This was attributed to the introduction of
new video game devices by prominent designers and producers of video
game devices. With several new video game consoles to be released by
major market players, this may drive the demand for the plastic injection
mold fabrication and plastic injection molding in the PRC.
Pachinko: In early 2012, the entertainment industry, including the
electronic game arcades, was named as one of the major industries for
future development in the 12th Five Year Plan of the PRC. It is expected
that the relevant government policies will assist the pachinko manufacturing
industry (in terms of processing trade) in the PRC, and thus boosting the
demand for plastic injection molds and plastic injection molding in the PRC.
Rising ASP, raw material prices under pressure
The average per unit price of plastic injection molds and plastic components
manufactured by plastic injection molding have been increasing steadily from
2008-2012.During the track record period, the average price of exported plastic
injection molds increased at a CAGR of around 7.5% to USD13.9/kg in 2012.
During the same period, the average price of exported plastic components
manufactured by plastic injection molding grew at CAGR of approximately 9.8%
to USD18.0 per kilogram in 2012, at a CAGR of approximately 9.8%. Such
increases were primarily due to increasing production costs and a shift to higher
priced products by the PRC manufacturers.
While the average unit price (export price) of plastic injection molds and plastic
components are on the uptrend, the raw material prices have been facing
downward pressure in 2010-2012. Steel and petrochemical products are the key
raw materials in producing plastic injection molds and plastic components, and
they are highly correlated to the global economy
Page 34 / 36
Exhibit 33: Average unit price has been on the uptrend
Source: The PRC Customs,Ipsos
Due to global economic recession followed by the Financial Turmoil in 2008, a
slowdown in demand and led to further oversupply of steel products, the steel
price in China has tumbled 15.3% on aggregate from 2008-2012. During 2012,
the price of plastic resins such as PC and PA dropped 10.3% on average. Given
the lack of growth momentum in the worldwide economy, these raw material
prices may remain under pressure which in turn supported the profit margins of
molds and plastic component products.
Exhibit 34: Raw material prices still under pressure
Source: National Bureau of Statistics,Ipsos, WIND,CIRL
Fragmented industry with high entry barriers
Both the plastic injection mold fabrication and the plastic injection molding
industry segments are highly fragmented in the PRC. According to Ipsos, the top
5 PRC mold fabricators only accounted for 4.56% of the total revenue generated.
Though the industry is highly fragmented, the industry possesses factors that
may restrict from potential new comers.
12.412.3
15.417
18
10.4 10.211
1213.9
0
4
8
12
16
20
24
2008 2009 2010 2011 2012Export of plastic mold
Export of plastic components manufactured by plastic injection molding
(USD/ tonne)
80.0
100.0
120.0
140.0
160.0
09-Oct 09-Jan 09-Apr 09-Jul 09-Oct 09-Jan 09-Apr 09-Jul 09-Oct 09-Jan 09-Apr 09-Jul 09-Oct
Steel Price Index: High Speed: Φ6.5
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2008 2009 2010 2011 2012
Polycarbonate (PC) Polyamide (PA, nylon) Polybutylene terephthalate (PBT)
(USD/ tonne)
Page 35 / 36
Capital intensive investment: A large amount of capital investment is
required for mold fabricators to purchase a large amount of machineries,
equipment and apparatus. The recruitment of professionals and technical
staffs is also required. Additionally, mold fabricators often serve as part of
the supply chain for multinational companies, therefore large-scale
production capability is also crucial for mold fabricators to achieve economy
of scale.
Flexibility and ability to meet the production schedule of the
downstream customers: At the early stages of product life cycle,
customers may make changes to their design delivery schedule. They
expect manufacturers to be flexible and responsive to their changes. In
addition, the ability to deliver according to schedule is important to ensuring
regular order placing.
Multinational companies impose stringent requirements on product
quality and look for business partnerships that can maintain consistent
product quality. Therefore, plastic injection molding manufacturers with
advance technology have a clear advantage because multinational
companies are willing to offer a higher price for better and stable product
quality. The quality of plastic components manufactured by plastic
injection molding is closely associated with the quality of plastic injection
molds. Given the capacity and technology constraints, small-scaled
manufacturers may be less flexible or adaptive to customers’ changes in
design and delivery schedule
Proven track record and existing customer loyalty: To ensure product
quality, multinational companies and their suppliers normally maintain an
approved supplier list, and would not easily change their respective mold
suppliers. Therefore, new entrants without a proven track record would find
it difficult to enter into the market or even be included in the supplier list.
Securing orders from multinational companies or their suppliers are
important for plastic injection molding manufacturers. In order to be
included in the supplier list, plastic injection molding manufacturers normally
need to meet the qualification and quality control standards set by the
relevant companies
Page 36 / 36
Analyst Certification
I, Hayman Chiu, Senior Research Analyst of Cinda International Research Limited., hereby certify that all of the views
expressed in this report accurately reflect my personal views about the subject company or companies and its or their
securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the
specific recommendations or views expressed in this report / note.
Disclaimer
This report has been prepared by the Cinda International Research Limited. Although the information and opinions
contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International
Research Limited cannot and does not warrant the accuracy or completeness of any such information and analysis.
The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients
should understand and comprehend the investment objectives and its related risks, and where necessary consult their
own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and
forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable
and mutable situation, so may contain uncertainty. Any opinions expressed in this report are subject to change without
notice. The report is published solely for information purposes, and it does not constitute any advertisement and should
not be construed as an offer to buy or sell securities. Cinda International Research Limited will not accept any liability
whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This
document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others.