20080828-Yuanta KimEng-Wistron (3231 TT)

Downgrade on rich valuation
Transfer coverage and downgrade to HOLD: After cutting our
previously aggressive assumptions for 2H08 onwards, we lower our
2008 and 2009 earnings forecasts by 4.3% and 6.3% respectively.
Given bullish guidance for notebook (NB) shipment growth in 2009
(over 30% YoY), and Sony LCD-TV orders set to double, Wistron’s
share price has risen 24% since our last BUY call on 27 June. Our new
TP of NT$53.7 (vs. previous TP of NT$51.4) is based on a target P/E
of 11x 200F earnings after an 8% discount to factor in potential GDR
issues, and implies 11.6% upside. Although we downgrade to HOLD,
we acknowledge Wistron’s strong position in the NB ODM space.
Our view on Wistron:
► 2Q08 earnings of NT$1,430 mn came in 2.8% better than our
forecast owing to better-than-expected margin performance.
► Guidance is bullish on 2009 NB shipments, guiding over 30% YoY
growth, compared to our forecast of 25%.
► Sony LCD-TV orders are likely to double in 2009, driving overall
shipments to 3.5 mn units, up from just under 2 mn in 2008.
► The company will acquire Lite-On’s display business on Sep 1.
► Guidance is for gross margin to fall from 6.3% in 2Q08 to 5.5-6%
in 2H08 on the back of price declines on existing models.
Valuation discount on potential GDR issue: Wistron is evaluating its
need to boost working capital through a GDR issue, if revenue
growth can reach 30% in 2009. We see the chance as high based on
our 2009 revenue growth forecast of 31%. As such, we have applied
an 8% discount to factor in potential share dilution from a GDR.