Analyst Research Report Snapshot


Rechi Precision (4532 TT, NT$28.2, OP): Initiate coverage with Outperform




KGI Greater China


07 Nov 2013





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Earnings to jump in peak season Gross margin rises by the year as product mix improves We expect Rechi’s gross margin to rise from 12.97% in 2010 to 17.6% in 2014 as the firm’s compressor applications have extended to high-margin segments. Firstly, variable frequency compressor shipment weighting will likely rise from 5.1% in 2010 to 8.5% in 2014. Second, shipment weighting of clothes dryer (Rechi has over 90% market share in Europe) is expected to rise from 5% in 2010 to 9.6% in 2014. And third, shipment weighting of air conditioning compressors for recreational vehicles (RV) is expected to rise from 1.2% in 2010 to 2.41% in 2014. Product mix improvement should boost gross margin by the year. 4Q13 & 1Q14 earnings to grow 10.7% & 70.4% YoY amid peak season We expect 4Q13 and 1Q14 earnings to grow a respective 10.7% and 70.4% YoY for the following reasons. First, order outlook is good as peak season arrives. We expect shipments in 4Q13 and 1Q14 to both top 3.0mn units, up 6.8% vs. low season level in 3Q13. Second, scale of economies is manifested as Rechi is currently running at full capacity. Product mix is improving. Weighting of variable frequency compressor rose from 5.8% in early 2013 to over 7% presently. Fixed frequency compressors have also expanded applications. Gross margin is expected to rise 1.6 ppt from 16.3% in 3Q13 to over 17.8%. We forecast 4Q13 and 1Q14 EPS at a respective NT$0.54 and NT$0.67. Target price NT$36.0 – Initiate coverage with Outperform We expect the energy-saving electrical appliance market in China to hit Rmb50bn in the coming years as China actively pushes energy conservation and carbon reduction and offers subsidies for energy-saving and high-efficiency electric appliances. Shares are trading at 14.0x and 11.0x our 2013 and 2014 EPS forecast, in the middle of the peer average. Gross margin will likely rise by the year as the firm continues to develop energy saving, high-margin products. We forecast Rechi’s ROE will top peer average in the recent two years. We give a 12-month target price of NT$36.0 based on 14x 2014F EPS of NT$2.56. Initiate coverage with Outperform.

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