Date of Report: October 30, 2024
Broker: UOB Kay Hian
Company Overview
VSTECS Holdings (856 HK) is a leading IT distributor with a strong presence in the Asia-Pacific region, particularly Southeast Asia (SEA) and China. It offers a broad range of products and services, including cloud services, mobile internet solutions, system equipment, software, information security, network infrastructure, data storage, computer components, Internet of Things (IoT) applications, gaming products, drones, and virtual reality devices. VSTECS serves over 50,000 partners across APAC, positioning itself as a trusted partner of numerous global technology companies.
Market Position and Strategic Focus
VSTECS ranks as the eighth-largest IT distributor worldwide and holds a top position in SEA and China. Its extensive product portfolio and value-added services have made it a preferred partner for many leading technology firms and unicorn startups. The company benefits from its established footprint in SEA countries, including Singapore, Malaysia, and Thailand, along with a significant market share in China.
Riding the AI Wave
VSTECS is poised to capitalize on the rapid growth of artificial intelligence (AI) in the tech industry. Key drivers of this growth include:
- AI-PC and GPU Server Demand: With increasing data center development in SEA, demand for AI-related hardware like GPU servers and AI-compatible PCs is projected to grow significantly, with AI-PCs expected to make up 40% of total PC sales by 2025.
- GenAI Smartphone Adoption: The rollout of generative AI-enabled smartphones is projected to expand at a 78% compound annual growth rate (CAGR) from 2024 to 2028. AI products are expected to contribute to 20% of VSTECS’ sales in 2024-2025, a marked increase from previous years.
Starlink Partnership and Regional Expansion
VSTECS is a preferred distributor of Starlink, expanding its reach by distributing Starlink’s standard kits in Malaysia, Indonesia, the Philippines, and Thailand. The partnership leverages VSTECS’ first-mover advantage in the region, supported by its robust distribution network.
Diversified Cloud Services
VSTECS has diversified its cloud offerings beyond traditional cloud computing, venturing into multi-cloud management platforms, computing power scheduling, and AI-driven cloud management solutions. Cloud revenue grew at a 22.4% CAGR from 2021 to 2023, and future growth is expected to continue with the rising demand for computing power driven by AI applications.
Financial Performance and Projections
- Revenue Growth: Revenue is expected to grow by 7.7% in 2024, followed by 8.6% in 2025, driven by increased demand for AI solutions, consumer electronics, and cloud services.
- Profitability: VSTECS is forecasted to achieve a net profit CAGR of 9.2% between 2024 and 2026. The company’s gross margin is expected to remain stable at approximately 4.6-4.7% over this period, supported by rigorous cost controls and an expanding product portfolio.
- Dividend Yield: The company anticipates a dividend yield of 4.4% in 2024, increasing to 5.1% in 2025, underpinned by its strong cash flow.
Valuation and Recommendation
UOB Kay Hian initiated a “BUY” rating for VSTECS with a target price of HK$5.47, implying a 22.7% upside from its current price of HK$4.46. This valuation is based on a 7.3x price-to-earnings (PE) ratio for 2025, aligned with its historical mean PE from 2019 to 2024. Currently, VSTECS is trading at a one-year forward PE of 6.1x, 0.5 standard deviations below its historical average, indicating potential undervaluation.
