Thanks to strong electronic learning products.
According to Maybank Kim Eng, VTech’s FY3/13 net profit rose by 5% YoY to USD202m, within its estimates of USD204m and consensus of USD200m.
Revenue rose 4% YoY, mainly driven by strong sales growth in electronic learning products (+11% YoY) and contract manufacturing services (9% YoY). Gross margin improved slightly to 32.2% (FU3/12: 32%). VTech declared a final dividend of USD0.64, representing a full-year payout ratio of 99%.
Non-residential phones sales picking up. Sales of telecommunication (TEL) products declined 6% YoY in FY3/13. While we believe the TEL segment is facing structural challenges due to the mature residential phone market, the magnitude of deterioration may ease as the industry is also consolidating in the US, allowing VTech to gain market share.
Meanwhile, new income streams from non-residential phones grew rapidly, accounting for 12% of TEL sales in FY3/13 (FY3/12: 8%). Elsewhere, the key focus and drivers of the electronic learning products (ELP) FY3/14 will be the increase in sale and effort of software cartridges and apps downloading for its children’s tablets.
Stable gross margin. VTech’s FY3/13 gross margin of 32.2% stayed at a fiveyear low, as the company faced rising labour and manufacturing costs. Labour costs rose 20% YoY in FY3/13 and likely to rise again in FY3/14F. As we expect these trends to persist, VTech’s gross margin is unlikely to improve in the near term, despite softening raw material costs.
Little impact from yen depreciation. VTech purchases limited raw material from Japanese vendors and transactions are usually settled in USD. VTech does not see the yen depreciation being of much benefit to its Japanese competitors in the TEL segment as their manufacturing bases are usually located outside of Japan.
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