Documente Academic
Documente Profesional
Documente Cultură
Jan F. Moermann
Havard Chi
www.quarzcapital.com
This presentation is a research report and is for informational purposes only. Opinions expressed are solely those of Quarz
Capital Management, Ltd. and this is not a recommendation to purchase securities discussed herein. This presentation is
confidential and may not be reproduced or distributed without the expressed consent of Quarz Capital Management, Ltd.
Please refer to the next slide for additional disclosures.
Quarz Capital Management
LEGAL DISCLAIMER
DISCLAIMER
As of the publication date of this report, Quarz Capital Management Ltd. and its affiliates (collectively "Quarz"), others that contributed research to this report and
others that we have shared our research with (collectively, the “Authors”) have long positions in and own options on the stock of the company covered herein
(Sunningdale Tech Ltd) and stand to realize gains in the event that the price of the stock increases. Following publication of the report, the Authors may transact in
the securities of the company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information herein from
sources they believe to be accurate and reliable. However, such information is presented “as is”, without warranty of any kind – whether express or implied. The
Authors make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained
from its use. All expressions of opinion are subject to change without notice, and the Authors do not undertake to update or supplement this report or any
information contained herein.
This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information
are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected
public market data and reflects prevailing conditions and the Authors’ views as of this date, all of which are accordingly subject to change. The Authors’ opinions
and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This
report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as,
or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor.
This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of
the affiliates of the Authors. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in
which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors’ abilities and beliefs, all information contained
herein is accurate and reliable. The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company
discussed in this document at any time. As of the original publication date of this document, investors should assume that the Authors are long shares of
Sunningdale Tech Ltd and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market
valuation of the company’s common equity is higher than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to
inform any investor about their historical, current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other
companies, securities, or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the
overall profitability of the Authors’ operations and their affiliates. The compensation structure for the Authors’ analysts is generally a derivative of their effectiveness
in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict
of interest in the statements and opinions in the Authors’ documents.
The information contained in this document may include, or incorporate by reference, forward- looking statements, which would include any statements that are not
statements of historical fact. Any or all of the Authors’ forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out
to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of
which are beyond the Authors’ control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on
all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any
investment decision.
2
Quarz Capital Management
Content
• Executive Summary – Sunningdale Tech’s Undervaluation
• Executive Summary – Our Recommendations
• Quarz’s Due Diligence on Sunningdale Tech
• The Sunningdale Tech Opportunity
• Sunningdale’s Key Expertise
• Investing for Future Growth
• Strategic Acquisitions
• Quarz’s Recommendations for Sunningdale Tech
• Potential Total Return for Sunningdale’s Shareholders
• Analysis of Shareholder Base
Quarz is fully supportive of Sunningdale’s board and management team and would like to
provide the following recommendations:
Distribute at least 60% of Core Net Income (dividend yield of ~7.1% in 2019E). We estimate SUNN has a substantial
1 working capital of ~S$230million (~88% of Mkt Cap), Net Cash positive and S$118million of Cash*. Free Cash Flow will
further increase in 2019E to >S$35million post the conclusion of heavy capex phase from 2014 to 2018E (CapEx of
>S$130million)
2
Return 50% of estimated net proceeds of ~S$22m from the disposal of the non-core factory in Zhongshan, China to
shareholders (special dividend yield of ~4.2%). Firm still retains S$11million of proceeds to fortify balance sheet and
deploy to other projects
3 Ramp up on acquisition strategy to increase expertise and competitive advantage. As OEMs continue to roll-out
global manufacturing platforms, suppliers who can consistently deliver high quality, substantial volume and diverse products
as well as support ‘just in time’ production are given priority. Suppliers with larger scale and global footprint are able to
penetrate more product categories, invest in leading technologies and compete in complex and demanding projects. The
reduced competition can result in higher margin and revenue stability
4 Seize growth opportunities in structural growth areas ‘Megatrends’ such as Electro-Mobility, Autonomous Driving
and Connectivity. Leverage on growing demand for more active components, sensors and electronics requiring higher
precision parts which can increase SUNN’s revenue growth and margins
Quarz intends to increase its stake in Sunningdale on further price weakness and believes that the firm can
provide a total upside of >40% to all shareholders in the mid-term
* Including estimated Free Cash Flow of S$8m generated in 4Q18E and net proceeds of S$8m from factory divestment
Source: Quarz Capital Management, Sunningdale Tech Limited
5
Quarz Capital Management
Quarz’s Due Diligence on Sunningdale Tech
Quarz has carried out thorough research in collaboration with external advisors and partners to
understand the opportunity at Sunningdale Tech
Due Diligence Process
Institutional
• In-depth discussions with research analysts from local and international investment banking firms
Investors and
• Further evaluation with potential and existing institutional investors of Sunningdale
Analysts
Consumer
59%
Source: Quarz Capital Management, Sunningdale Tech Limited
7
Quarz Capital Management
The Sunningdale Tech Opportunity (2/3)
Share Price Does Not Account For Cash Generative Operating Business:
• SUNN trades at a discount to Liquidation
400 Value
Potential EXCESS CAPITAL
Upside Share price does
not account for Inventories (S$153m) + Net Trade
350 of ~65%
to Mkt
operating business Receivables (S$27m) + Net Cash (S$8m)
Cap S$ 251m ≈
300
Value of
Ops
$ 341m
70% of Current Mkt Cap
P/E of
250 11x 19E • Investors receive:
S$ million
(include
50% of
net
200 working 1. PPE of S$190m (~70% of Mkt Cap) with
capital)
S$ 8m >S$ 130m invested bet 2014-2018E
S$ 27m
150 Share Capped
Price Downside
2. 2019E Net Income and Free Cash Flow
S$ 261m
@ S$ Liquid of ~S$31.0m / S$36.0m (P.E and
1.39 Assets (Net
100 cash and
EV/EBITA of 8.4x and 3.5x respectively)
working
capital) S$ 153m
equivalent to
50 ~70% of Mkt
Cap
0
Potential Upside of ~65% to SUNN’s
Current Mkt Cap
Inventories Net Trade Receivables
SUNN's Valuation
Net Cash Value of Biz
Current Share Price
Source: Quarz Capital Management, Sunningdale Tech Limited
8
Quarz Capital Management
The Sunningdale Tech Opportunity (3/3)
Underperformance Of Sunningdale’s Share Price Vs Peers
Contract Manufacturing peers normalised to Sunningdale’s Share Price of S$ 1.115 on April 2016
3.00
-- Sunningdale ‘Short attack’ on
2.80
-- SG Peers Investors’ ‘overexuberance’ on Contract
Venture Corp
Manufacturers
Weaker/
2.60 negative YoY
Quarterly
Takoever offer for Fischer
Tech @ 64% premium to 3- results for
2.40 mth VWAP most players
1.00
Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
Source: Bloomberg, SGX, Quarz Capital Management, Sunningdale Tech Ltd
9
Quarz Capital Management
Sunningdale’s Key Expertise - Auto Segment (1/3)
Summary: 300 8
Revenue has increased
• Comprises ~36%/40% of Revenue/PBT by >150% in 6 years
250 6
Improving margin
• Supplies automotive interior and exterior plastic components
as revenue scales 4
• Specialize in products with high emphasis on aesthetics and precision 200
Takeover of
(integration with other system, eg. audio, dashboard, steering) 2
150 First Engineering
• Supplies to top tier auto suppliers (e.g. Bosch, Magna, Continental, Delphi, 0
Visteon) which integrates SUNN’s products in OEMs such as BMW,GM, Land 100
-2
Rover, Toyota, Lexus Mini, Mazda, Honda, Suzuki
50 -4
• Tends to be sole or dual supplier for specific components
0 -6
2010 2011 2012 2013 2014 2015 2016 2017
Competitive Advantage and Upside: Revenue PBT Margin (RHS)
• Supplied components are tied to particular models with product cycles of 5-7
years - revenue stability and visibility for SUNN
• Diversified client base – low exposure to particular OEM brands and vehicle
models
• Strong barriers to entry attributed to stringent certification and quality
standards required - Clients prefer to continue long term relationship with
suppliers who charge reasonable margins and have track record of delivering
consistently high quality products
• Secular trend of substituting metal for plastic components due to cheaper
cost, greater design flexibility, lower weight and higher durability
• End demand of autos in developed markets such as Europe and US
continues to remain strong supported by decreasing unemployment, higher
real wage and economic growth
Air Bag
Cover
Steering
Columns
Access Key
4Q 1Q
High volume sell-through with Distributors/retailers sell down
strong demand throughout remaining stocks after holiday
supply chains season
SUNN continues to receive Inventory level in supply
strong orders which increase chains decreases
its utilisation rate, operating
leverage and profits
3Q 2Q
New product launches in Seasonal demand is
anticipation of holiday season moderately up from 1Q
Distributors/retailers start Companies phase out older
stockpiling for higher demand products and prepare to
SUNN ramps up production launch new ones in 2H to
to support customers’ capitalize on holiday season
inventory stockpiling
30
25
20
15
10
0
2010 2011 2012 2013 2014 2015 2016 2017 1H18
Elevated CapEx spending will end in 2018 – Normalised CapEx of ~S$25million vs Depreciation of ~S$30million
EBITDA and Free Cash Flow can increase to >S$70 million and >S$35million in 2019E
EV/EBITDA and EV/FCF of 3.5x and ~7.1x going forward
Source: Quarz Capital Management, Sunningdale Tech Ltd, Memtech International Limited, Spindex Industries Limited, Fu Yu Corporation
Limited 16
Quarz Capital Management
Investing for Future Growth (2/2)
Virtuous Cycle Of Heavy Investments Boosts SUNN’s Scale & Expertise Which
Increase Profitability And Cashflow To Further Fund Investments
Higher Barriers to Entry
Large capital investment required in machines, certification, factory space and
engineering expertise
Established long-term relationships with Tier 1 auto suppliers and consumer
companies
Significantly lower profitability and ROA/ROE for smaller-scale ‘sub-optimal’
operations to discourage new entrants
Global footprint (situated closer to customers’ facilities) reduces transportation
cost and delivery time (support ‘just in time’ production)
Technological Advantages
Outspend peers on investing in new technology and techniques
Able to mass produce with low scrap/loss rate with high-cavitation injection
moulding
Newer and more versatile equipment which can be quickly reconfigured to
produce different parts and components – increase in utilization rate
Items
Increase Efficiency of Capital Allocation
• Commit to distribute at least 60% of Core Net Income as dividend (~7.1% dividend yield in 2019E)
• Distribute at least 50% of potential proceeds from sale of Zhongshan factory (~4% dividend yield)
• Conclusion of heavy investment phase can allow SUNN to generate >S$35million of free cash flow
• SUNN retains ~S$17m of cashflow post dividend and CapEx of S$25million
22
LEGAL DISCLAIMER
Please read our full disclaimers in our presentation and on our website
where you subscribed. This communication is for informational and
educational purposes only and shall not be construed to constitute
investment advice. Nothing contained herein shall constitute a solicitation,
Quarz Capital ASIA (Singapore) PTE. LTD. recommendation or endorsement to buy or sell any security or other
financial instrument or to buy any interests in any investment funds or
Havard Chi, CFA other accounts. Quarz and/or its affiliates or clients have long positions in
Head of Research the company discussed herein, and stand to realize gains in the event
📧 E-mail hch@quarzcapital.com that the price of the stock increases. Quarz and its clients/affiliates will
📞 Tel +65 (0)94 33 3898 transact in securities of the company discussed herein subsequent to
publication. The sender has no obligation to update the information
contained herein and may make investment decisions that are
REGISTERED OFFICE inconsistent with the views expressed in this communication. To the best
Quarz Capital Management, Ltd. of Quarz's knowledge, the information contained herein is accurate and
Clifton House, 75 Fort Street reliable, but the information is presented "as is". The sender makes no
P.O. Box 1350, George Town representations or warranties as to the accuracy, completeness or
timeliness of the information, text, graphics or other items contained in this
Grand Cayman, KY1-1108
communication. The sender expressly disclaims all liability for errors or
www.quarzcapital.com omissions in, or the misuse or misinterpretation of, any information
contained in this communication.