Elevator Pitch

I maintain a Neutral rating on Hong Kong-listed Techtronic Industries Company Limited (OTCPK:TTNDY, OTCPK:TTNDF, 669:HK), a manufacturer of cordless power tools.

This is an update of my prior article on Techtronic Industries published on March 24, 2020. The share price has more than doubled since my last update, from HK$42.45 as of March 23, 2020 to HK$94.90 as of September 9, 2020. The company trades at 25.8 times consensus forward FY 2021 P/E, and it offers a consensus forward FY 2021 dividend yield of 1.6%.

Techtronic Industries’ revenue and net profit grew by +12.8% YoY and +16.2% YoY in 1H 2020, which was above market expectations. Market share gains, product innovation and profitability improvement will be the key earnings growth drivers for the company going forward, and will determine if its future earnings growth is sustainable. I retain my Neutral rating on Techtronic Industries, as expectations of strong YoY earnings growth in the high teens for the company in 2H 2020 have already been priced in.

Readers have the option of trading in Techtronic Industries shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers TTNDY and TTNDF or on the Hong Kong Stock Exchange with the ticker 669:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $30 million, and market capitalization is above $22 billion, which is comparable to the majority of stocks traded on the US stock exchanges.

Institutional investors which own Techtronic Industries shares listed in Hong Kong include First State Investments, Schroder Investment Management, The Vanguard Group, MFS Investment Management, and BlackRock, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers and Fidelity, or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

1H 2020 Earnings Beat

Techtronic Industries announced 1H 2020 financial results on August 12, 2020, which were above expectations.

The company’s revenue increased by +12.8% YoY, from $3,728 million in 1H 2019 to $4,206 million in 1H 2020. Its net profit attributable to shareholders and earnings per share grew by +16.3% YoY and +16.2% YoY to $332 million and $0.1814, respectively in the first half of the year. Techtronic Industries’ gross profit margin expanded by +40 basis points from 37.6% in 1H 2019 to 38.0% in 1H 2020, while its EBIT increased by +15.6% YoY to $363 million over the same period.

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It is noteworthy that the company’s +12.8% YoY revenue growth in 1H 2020 was way ahead of its earlier guidance of a high-single digit top line growth for full-year FY 2020 at its FY 2019 earnings call on March 4, 2020. This translated into strong high-teens earnings growth, which beat market expectations of bottom line expansion in the low teens for 1H 2020. Techtronic Industries attributed the robust top line growth to new products, e-commerce sales and expansion of its worldwide sales network at the company’s 1H 2020 earnings call on August 13, 2020.

The share price has been rising increasing in the past six months since its year-to-date share price trough of HK$42.45 on March 23, 2020. Initially, there were concerns that Techtronic Industries’ revenue concentration in North America (accounting for 77.1% of its FY 2019 revenue), where the COVID-19 situation was worrying in the early part of the year, could pose downside risks to the company’s financial performance this year.

But the easing of lockdown measures in North America (and other parts of the world as well) and Techtronic Industries’ better-than-expected earnings growth for 1H 2020 have put such concerns to rest. Notably, the company’s segment revenue for the North American market expanded by +14.3% YoY, from $2,845 million in 1H 2019 to $3,252 million in 1H 2020. This led to strong share price performance in the past six months.

Strong Earnings Growth Momentum Expected To Be Sustained In 2H 2020

Sell-side analysts see Techtronic Industries’ revenue and net profit growing by +12% and +17% YoY to $8.6 billion and $722 million respectively in FY 2020. This is on par with the company’s +12.8% YoY and +16.2% YoY growth in its top line and bottom line, respectively, in the first half of the year.

The company noted at its 1H 2020 results briefing on August 13, 2020 that “we are confident that the growth momentum will continue into the second half of the year and beyond,” and stressed that “we intend to outgrow the market not just in 2020 but over the next five years.”

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Looking ahead, market share gains, product innovation and profitability improvement will be the key earnings growth drivers for Techtronic Industries, as detailed in the subsequent sections of this article.

Market Share Gains

Techtronic Industries highlighted at its recent 1H 2020 earnings call that it has outperformed its peers in the first half of the year. For example, Makita Corporation’s (MKTAY, OTC:MKEWF) top line declined by -0.1% YoY in 1H 2020, while Stanley Black & Decker’s (SWK, SWJ) Tools & Storage business segment saw a -13% YoY decrease in its segment revenue for 1H 2020. In other words, Techtronic Industries has gained market share at the expense of its competitors, which contributed to its better-than-expected revenue growth in the first half of the year.

At its 1H 2020 results briefing, Techtronic Industries emphasized that “there is an incredible opportunity for TTI (Techtronic Industries) to accelerate the pace in which we achieve global leadership” because of “competitors who continue to boast about taking costs out and firing people and reducing their overhead.” In contrast, the company has continued to invest in production capacity, new product development and new talent with an eye towards better serving its clients’ needs in a challenging environment like these, and this has paid off in the form of market share gains and top line growth.

Product Innovation And Profitability Improvement

Techtronic Industries’ gross profit margin increased +40 basis points YoY in 1H 2020, which was very decent, but this fell short of the company’s earlier guidance of a +50 basis points YoY expansion in gross profit margin for FY 2020. This was likely due to a slightly less favorable sales mix, where sales contribution of lower-margin products increased as compared to that of higher-margin products.

Nevertheless, Techtronic Industries stressed at its 1H 2020 earnings call on August 13, 2020 that “our new products that we are launching that have demonstrably better features and performance characteristics than our competition” and they “are commanding premium prices in the market.” This is evidenced by the fact that 2020 is the 12th consecutive year that the company has expanded its gross margin on a YoY basis in the first half of the year.

Also, it is noteworthy that Techtronic Industries’ selling, general & administrative or SG&A expenses as a percentage of total revenue increased only slightly from 29.3% in 1H 2019 to 29.5% in 1H 2020, despite the company continuing to invest to grow its businesses. This was because the company has derived some cost savings by cutting back on what it terms as non-strategic SG&A.

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Valuation And Dividends

Techtronic Industries trades at consensus forward FY 2020 and FY 2021 P/E multiples of 31.0 times and 25.8 times, respectively, based on its share price of HK$94.90 as of September 9, 2020. In comparison, the stock’s five-year and 10-year mean consensus forward next twelve months’ P/E multiples were 18.7 times and 16.3 times, respectively. The company is also valued by the market at consensus forward next twelve months’ EV/EBITDA and EV/EBIT multiples of 18.9 times and 26.5 times, respectively.

Techtronic Industries offers consensus forward FY 2020 and FY 2021 dividend yields of 1.3% and 1.6%, respectively. Market consensus expects its dividends per share to increase from HK$1.03 in FY 2019 to HK$1.23 and HK$1.49 for FY 2020 and FY 2021, respectively.

The company declared an interim dividend of HK$0.53 per share of 1H 2020, which represents an +18% YoY growth in absolute terms (as compared to dividends per share of HK$0.45 for 1H 2019) and a slight increase in its dividend payout ratio from 37.1% in 1H 2019 to 37.6% in 1H 2020.

Risk Factors

The key risk factors for Techtronic Industries include a slowdown in the pace of new product innovation, market share loss to rivals and profit margin expansion falling short of market expectations.

Note that readers who choose to trade in Techtronic Industries shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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