先思行集团(00595)：AV Concept (595 HK) – A high-brightness growth prospect

Kingsway Research Industrials May 27, 2010 Hong Kong Johnny Lau (852) 2283 7618 Johnny.lau@kingswaygroup.com www.kingswayresearch.com Kingsway Financial Services Group Limited Please see the important disclaimer and disclosures (if any) at the end of this report AV Concept BUY 595.HK / 595 HK Initiate coverage HK$1.05 (May 26, 10) A high-brightness growth prospect Target price: HK$ 1.49 (Upside: 41.9%) HSI: 19,196.45 (May 26, 10) ► Electronics distributor with LED exposure – AV Concept, a distributor of electronic components, holds 21.32% of Wave Square Inc (WS), a Korean company that develops high brightness LED (HB LED) chips. ► HB LED market is huge – HB LED is currently a market worth US$5b in value. Major applications include lighting, signals, automotive, displays, signs, mobile phones and other mobile applications. The LED backlight sectors will have a CAGR of 40%. ► Distribute Samsung LED – Benefiting from the technology trend, the company also formed a 50:50 JV Flex to distribute Samsung LEDs. ► Riding on the 3D LED TV trend – AV owns 20% interest in the Korean company, ACCUPIX, which has co-worked and developed 3D glasses with leading industry players and has many 3D projects in development. ► Valuation - On a sum of the parts basis, we value the company at HK$1.49/share, which offers 41.9% upside and implies a FY11 PE of 8.1x. If AV can secure orders from large clients, we believe investors are willing to pay a higher valuation and, under this best-case scenario, the valuation could go up to HK$2.43/share, which offers 131% upside potential. AV is now trading on 5.7x FY11 PE, which is at 55% discount to peers’ average of 12.8x. When comparing to some industry leaders, such as Cree’s 33.9x and Epistar’s 18.9x, the discount is even larger. On the back of 41.9% upside, strong growth potential and deep valuation discount versus peers, we initiate coverage on AV Concept with a BUY recommendation. Share Data 52week Hi/Lo (HK$) 1.51/0.26Avg. daily t/o (US$m) 0.243Market cap. (US$m) 62.80Total issued shares (m) 466.36Public float (%) 31.62%Major shareholder: Yuk Kwan So 56.16%OZ Management LLC6.11%SW Kingsway Capital6.11%Source: HKEx & Bloomberg Company Profile AV Concept, a distributor of electronic components, holds 21.32% of Wave Square Inc, a Korean company that develops high brightness LED chips. Share Price Chart Source: Bloomberg Earnings Forecasts & Valuation Summary Year ended 31 Mar 08A09A10F11F 12FSales (HK$m) 2,924 2,013 2,013 2,013 2,013 EBITDA (HK$m) 30 (48)63 27 27 Net profit (HK$m) 4 (66)39 99 174 Fully diluted EPS (HK$) 0.010 (0.161)0.082 0.184 0.324 YoY change (%) -106.3 -1719.8 -150.9 +125.1 +76.2 Consensus EPS (HK$) N/AN/AN/AN/A N/APE (x) 105.8 (6.5)12.8 5.7 3.2 EV/EBITDA (x) 25.2 (12.5)9.0 22.4 22.1 DPS (HK$) 0.030 0.000 0.000 0.000 0.000 Yield (%) 2.9 0.0 0.0 0.0 0.0 P/B (x) 1.24 1.57 1.41 1.09 0.81 ROE (%) 1.2 (21.1)12.6 23.2 29.5 ROIC (%) 4.3%-9.2%11.5%4.1% 3.2%Net debt / equity (%) 90.1 59.1 24.0 12.9 7.7 Source: Company data, Kingsway Research estimates Kingsway Research AV Concept (27 May 10) Page 2A high-brightness growth prospect A brief background AV concept was found in 1980 and started in the marketing and distribution of semiconductors. Currently, it distributes a wide range of products from Samsung Electronics and Fairchild Semiconductor in the Greater China region and South-East Asian countries. AV also holds 21.32% of Wave Square Inc (WS), a Korean company that develops high brightness LED (HB LED) chips. AV has a 50:50 JV Flex to distribute Samsung LEDs and also a 20% stake in Accupix, which develops and produces 3D glasses for TVs. Group structure Source: Company data Planting the LED seed Owns 21.32% in Wave Square AV invested a total of US$4m for a 21.32% stake in a HB LED venture, Wave Square. WS develops vertical HB LEDs with luminosity and other physical properties that are comparable to LEDs produced by Cree, another HB LED manufacturer in US. WS has successfully developed HB LED with its own processing method and has sent samples to potential customers, including Samsung and LG, for testing. WS plans to commence mass production in 2H10. WS currently only has 3 MOCVD reactors so production capacity is still small. However, once WS starts selling their LEDs, they will expand the production capacity to meet the high growth demand in the coming years. Distributor of electronics, Samsung LEDs, 3D LED TV glasses and investment in a HB LED venture WS develops vertical HB LEDs, which Cree is selling AV Concept Holdings Limited (595 HK)OperationsComponentsDistributionElectronicsP