Asia Pacific Equity Research
31 August 2006
Globe Union Industrial Corp
Overweight
1H06 net profit up 313%; reiterate Overweight
NT$27.20
31 August 2006
Price Target: NT$33.00
• Strong earnings recovery on track: Globe Union (GUIC)
reported 1H06 net profit of NT$292 million or EPS of NT$1.26,
up significantly by 313% Y/Y. This is in line with our expectation
and we reiterate our Overweight rating.
• ODM and OBM show robust growth in 1H06: Revenues from
the ODM business increased by 50% Y/Y while OBM revenues
grew by 20% Y/Y in 1H06. Robust revenue growth is the key
driver for a strong bottom-line recovery this year.
• Margins hold up well despite rising material prices: Margins
(on a consolidated basis) held up quite well in 1H06 despite raw
material price hikes, supported by strong growth of its high-margin
OBM business.
• Ex-dividend new price target of NT$33: We are not changing
our earnings estimates for GUIC as the results are in line with our
expectations. However, we have adjusted our price target to
NT$33 from NT$35 mainly on the back of new shares issued in
early August as dividends. Our August 2007 DCF-based price
target equates to 11x 2007E P/E and implies 21% potential upside
from the current level.
• Key risks to our view and price target: (1) potential raw
material price hikes; and (2) buoyancy of the US housing market.
Taiwan
Household Products
John ChungAC
(886-2) 2725-9874
john.ca.chung@jpmorgan.com
Nick Lai
(886-2) 2725-9864
nick.yc.lai@jpmorgan.com
Five-year share price performance
NT$
40
35
30
25
20
15
10
5
0
Aug-01
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Source: Datastream.
Share price performance analysis
Absolute
Relative
1M
2%
0%
3M
-9%
-5%
12M
-2%
-10%
Source: Datastream.
Reuters code: 9934.TW; Bloomberg code: 9934 TT
Company data
NT$ in millions, year-end December
Sales
EBITDA
Net profit
EPS (NT$)
Net debt (cash) to equity
P/E (x)
P/B (x)
ROE (%)
Dividend yield (%)
Sales growth
PAT growth
EPS growth
Gross margin
Net margin
FY05
9,720
653
218
0.92
-18%
29.6
1.1
4.6%
7.0%
-4%
-54%
-54%
34%
2%
FY06E
11,887
1,018
580
2.50
-20%
10.9
1.1
10.6%
3.8%
22%
166%
173%
33%
5%
FY07E
12,906
1,138
692
2.98
-21%
9.1
1.0
12.3%
7.4%
9%
19%
19%
33%
5%
FY08E
14,033
1,296
818
3.53
-21%
7.7
1.0
14.1%
8.8%
9%
18%
18%
34%
6%
52-wk range (NT$)
Mkt cap. (NT$B)
Mkt cap. (US$MM)
Shares O/S (MM)
Free float (%)
Avg. daily volume
Liquidity (US$MM)
Exchange rate (NT$/US$1)
Index (TWSE)
Year-end
20.0 - 31.2
6.4
196
237
*50
0.4M
0.3
32.9
6587.12
December
Source: Datastream, JPMorgan estimates.
Note: *Including foreign holding of 29%.
Source: Company, Bloomberg, JPMorgan estimates.
J.P. Morgan Securities (Taiwan) Limited.
See page 4 for analyst certification and important disclosures, including investment banking relationships.
JPMorgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
John Chung
(886-2) 2725-9874
john.ca.chung@jpmorgan.com
Asia Pacific Equity Research
31 August 2006
1H06 results summary
Globe Union (GUIC) reported 1H06 EPS of NT$1.26 or net profit of NT$292
million, up significantly by 313% Y/Y. This is in line with our expectation and we
are not changing our earnings estimates for the company. GUIC is due to report the
consolidated numbers on September 13, 2006. Nonetheless, our discussions with
management about the company’s 1H06 preliminary consolidated numbers support
our positive view of a strong fundamental recovery. Consolidated sales grew by 37%
Y/Y in 1H06, with the gross margin remaining steady at 32% despite raw material
price hikes. Strong growth of its high-margin OBM business was the major support
for GUIC’s margin level; revenues from the business grew by 20% Y/Y in 1H06.
Table 1: Globe Union—1H06 preliminary consolidated result
NT$ in millions
1H05
4,466
NA
1,491
NA
33%
142
NA
3%
93
71
-78%
2%
Net sales
Y/Y % growth
Gross profit
Y/Y % growth
Gross margin
Operating income
Y/Y % growth
Operating margin
Pre-tax income
Net income
Y/Y % growth
Net margin
1H06
6,135
37%
1,972
32%
32%
456
222%
7%
464
292
313%
5%
% of 2006E
52%
51%
61%
58%
50%
2006E
11,887
22%
3,892
19%
33%
753
69%
6%
795
580
166%
5%
Source: Company, JPMorgan estimates.
Valuation and recommendation
GUIC’s stock has outperformed the market by 7% YTD and is now trading at 11x
2006E or 9x 2007E P/E. We have not changed our earnings estimates as the
company is on track to reach our full-year estimate. However, we have adjusted our
EPS and price target to NT$33 from NT$35 mainly to reflect the changes in the
number of shares after the stock dividends were paid in early August. We reiterate
our Overweight rating on GUIC. Our DCF-based August 2007 price target equates to
11x 2007E P/E and implies 21% potential upside from current level.
Figure 1: Globe Union—P/B band
Figure 2: Globe Union—One-year forward P/E band
NT$
NT$
50
80
1.6 x
1.4 x
1.2 x
1.0 x
0.8 x
0.6 x
0.4 x
40
30
20
10
Jan-02
Jan-03
Source: TEJ, JPMorgan estimates.
2
50
40
30
20
10
0
0
Jan-01
25 x
22 x
19 x
16 x
13 x
10 x
7x
4x
70
60
Jan-04
Jan-05
Jan-06
Jan-01
Jan-02
Jan-03
Source: TEJ, JPMorgan estimates.
Jan-04
Jan-05
Jan-06
John Chung
(886-2) 2725-9874
john.ca.chung@jpmorgan.com
Asia Pacific Equity Research
31 August 2006
Company profile
Globe Union Industrial Corp. (GUIC) is the largest faucet and bathroom accessories
manufacturer in Asia. With its headquarters and R&D center in Taiwan and
manufacturing plants in China, the company exports most of its products to the North
American market, which accounted for 85% of the consolidated revenue in FY05.
Established in 1979, GUIC has ODM and OBM business lines, which accounted for
56% and 44% of consolidated revenues in FY05, respectively. For its ODM business,
Home Depot is a major customer, accounting for 22% of consolidated revenues.
For its OBM business, GUIC has four major brands in different regions: Gerber and
Danze in the US, Gobo in China, and Lenz in Germany. We believe the OBM
business in the US and ODM business in Europe should be the major growth drivers
in the near-to-mid term, while the Chinese market offers strong growth potential for
the OBM business in the long term.
Figure 3: Globe Union—2005 consolidated revenues breakdown by
product
Accessory
Others
8%
1%
Figure 4: Globe Union—2005 consolidated revenues breakdown by
region
Europe
Show erheads
China
Other
2%
7%
6%
9%
Vitreous
China
18%
Source: Company.
Faucets
North America
64%
85%
Source: Company.
3
John Chung
(886-2) 2725-9874
john.ca.chung@jpmorgan.com
Asia Pacific Equity Research
31 August 2006
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures
•
•
Client of the Firm: Globe Union Industrial Corp is or was in the past 12 months a client of JPMSI.
Non-Investment Banking Compensation: An affiliate of JPMSI has received compensation in the past 12 months for products or
services other than investment banking from Globe Union Industrial Corp.
Globe Union Industrial Corp (9934.TW) Price Chart
Date
60
20-Jan-06 OW
50
40
Price(NT$)
Rating Share Price
(NT$)
26.17
Price Target
(NT$)
38.00
OW NT$38 OW NT$35
30
20
10
0
Aug
03
Nov
03
Feb
04
May
04
Aug
04
Nov
04
Feb
05
May
05
Aug
05
Nov
05
Feb
06
May
06
Aug
06
Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.
Initiated coverage Jan 18, 2006. This chart shows JPMorgan's continuing coverage of this stock; the current analyst may
or may not have covered it over the entire period. As of Aug. 30, 2002, the firm discontinued price targets in all
markets where they were used. They were reinstated at JPMSI as of May 19th, 2003, for Focus List (FL) and selected Latin
stocks. For non-JPMSI covered stocks, price targets are required for regional FL stocks and may be set for other stocks
at analysts' discretion.
JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:
JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: John Chung: Basso Industry Corp (1527.TW), Formosa International Hotel (2707.TW), Giant Manufacturing
(9921.TW), Globe Union Industrial Corp (9934.TW), Makalot Industrial Co. Ltd. (1477.TW), Nien Made Enterprise (9915.TW), St.
Shine Optical Co., Ltd. (1565.TWO)
4
John Chung
(886-2) 2725-9874
john.ca.chung@jpmorgan.com
Asia Pacific Equity Research
31 August 2006
JPMorgan Equity Research Ratings Distribution, as of July 3, 2006
JPM Global Equity Research Coverage
IB clients*
JPMSI Equity Research Coverage
IB clients*
Overweight
(buy)
42%
44%
38%
62%
Neutral
(hold)
40%
47%
47%
57%
Underweight
(sell)
18%
37%
15%
47%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.
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5
John Chung
(886-2) 2725-9874
john.ca.chung@jpmorgan.com
Asia Pacific Equity Research
31 August 2006
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6
John Chung
(886-2) 2725-9874
john.ca.chung@jpmorgan.com
Asia Pacific Equity Research
01 August 2006
Globe Union Industrial Corp: Summary of financials
(consolidated)
Profit and loss statement
Cash flow statement
NT$ in millions, year-end December
Net sales
Gross profit
Operating income
Interest income
Investment income
Total non-op. income
Interest expenses
Total non-op. exp.
Pre-tax income
Income tax expense
Net income
EBIT
EBITDA
EPS (NT$)
Growth (%)
Sales
PBT
PAT
EPS
NT$ in millions, year-end December
FY05
9,720
3,265
447
32
0
111
80
195
363
103
218
442
653
0.92
FY06E
11,887
3,892
753
47
0
131
67
89
795
199
580
862
1,018
2.50
FY07E
12,906
4,301
879
50
0
138
70
95
923
231
692
993
1,138
2.98
FY08E
14,033
4,778
1,043
69
0
140
71
92
1,091
273
818
1,162
1,296
3.53
-4%
-59%
-54%
-54%
22%
119%
166%
173%
9%
16%
19%
19%
9%
18%
18%
18%
Net income
Depreciation
Amortization
Dec(inc)-A/R
Dec(inc)-Inventory
Inc(dec)-A/P
Other adj.
Cash flow - operating
Sales (purchase) LT invest
Sales (purchase) of FA
Others
Cash flow - inv.
Free cash flow (opt + invt CF)
Dividend paid
Inc(dec) - S-T debt
Inc(dec) - L-T debt
Others
Cash flow - financing
Cash equiv. - begin
Cash equiv. - end
Balance sheet
Ratio analysis
NT$ in millions, year-end December
Year-end December
Cash and equivalent
Marketable security
A/R and N/R
Inventories
Total current assets
Long-term investment
Total fixed assets
Total other assets
Total assets
Short-term borrow.
Bills issued
A/P and N/P
Total current liab.
LT liabilities
Total other LT liab
Total liabilities
Common stocks
Total equity
Total liab and equity
FY05
3,029
141
2,198
1,964
7,586
478
1,405
565
10,034
1,094
0
1,382
3,407
1,102
158
4,668
2,152
5,366
10,034
Source: Company, JPMorgan estimates.
Note: * Dividends paid for last year’s earnings.
FY06E
3,283
141
1,971
1,971
7,621
483
1,329
552
9,986
1,194
0
1,162
3,234
1,092
127
4,454
2,152
5,532
9,986
FY07E
3,418
141
2,061
2,122
7,996
488
1,264
539
10,287
1,294
0
1,218
3,378
1,082
117
4,577
2,152
5,710
10,287
FY08E
3,456
141
2,226
2,282
8,359
493
1,170
534
10,557
1,294
0
1,307
3,447
1,072
117
4,636
2,152
5,921
10,557
Financial structure
Total debt/total asset
Net debt to equity
Liquidity
Current ratio (x)
Quick ratio (x)
Interest cover (x)
Margins
Gross margin
Operating margin
Net margin
Profitability
ROE
ROA
ROCE
Others
BV per share (NT$)
Cash dividend (NT$) *
Dividend yield
FY05
218
178
33
(708)
(276)
477
175
96
(466)
(115)
286
(296)
(201)
(378)
(116)
(32)
2,195
1,669
1,474
3,029
FY06E
580
136
20
227
(8)
(220)
4
739
(5)
(60)
(79)
(144)
595
(431)
100
(10)
0
(341)
3,029
3,283
FY07E
692
125
20
(90)
(151)
56
4
657
(5)
(60)
(34)
(99)
558
(514)
100
(10)
0
(424)
3,283
3,418
FY08E
818
113
20
(164)
(160)
89
4
720
(5)
(20)
(39)
(64)
656
(608)
0
(10)
0
(618)
3,418
3,456
FY05
22%
-18%
FY06E
23%
-20%
FY07E
23%
-21%
FY08E
23%
-21%
2.2
1.6
5.6
2.4
1.7
12.8
2.4
1.7
14.2
2.4
1.7
16.3
34%
5%
2%
33%
6%
5%
33%
7%
5%
34%
7%
6%
5%
2%
4%
11%
6%
10%
12%
7%
12%
14%
8%
13%
24.93
1.90
7%
25.70
1.03
4%
26.53
2.00
7%
27.51
2.39
9%