Report Date: October 30, 2024
Broker: UOB Kay Hian
Company Overview
Market Position
VSTECS Holdings is a prominent IT distributor, ranking as the eighth largest globally, with a strong presence in Southeast Asia (SEA) and China. The company is well-regarded for its extensive reach and product portfolio, serving over 50,000 partners across the Asia Pacific region. VSTECS is the primary IT distributor in SEA countries such as Singapore, Malaysia, and Thailand, and is the second largest in China.
Product and Service Portfolio
VSTECS offers a comprehensive range of IT solutions, including cloud services, mobile internet, system equipment, software, network infrastructure, and data storage. The company’s portfolio encompasses emerging technology areas like artificial intelligence (AI), gaming, drones, and virtual reality. Their diverse product lineup caters to 80% of the world’s leading technology companies and various unicorns.
Growth Drivers and Market Positioning
AI Adoption and Sales Growth
VSTECS is strategically positioned to capitalize on the growing adoption of AI technologies. The company expects AI-related products, such as GPU servers, AI-PCs, and GenAI smartphones, to contribute significantly to sales. AI-PCs, projected to account for 40% of the PC market by 2025, are a notable growth area, while AI-related products’ sales contribution is estimated to increase from 6% in 2023 to 20% by 2024-2025.
Starlink Partnership in Southeast Asia
VSTECS has partnered with Starlink to distribute its products in SEA, with successful market entries in Malaysia, Indonesia, the Philippines, and Thailand. This partnership leverages VSTECS’ established distribution network and first-mover advantage, paving the way for further expansion as Starlink seeks greater penetration in SEA.
Cloud Services Expansion
The company’s cloud services segment is experiencing robust growth, driven by multi-cloud management platforms, computing power scheduling, and AI management solutions. This segment grew at a 22.4% CAGR from 2021-2023, and VSTECS projects a 14% CAGR from 2024-2026 as AI advancements spur demand for enhanced computing power and cloud services.
Accelerated Expansion in SEA
SEA is anticipated to be VSTECS’ primary growth engine from 2024 to 2026, supported by increased IT infrastructure investments and the region’s large population. Revenue from SEA markets is expected to rise from 24% in 2023 to 30-35% in 2024-2025, while the SEA net profit contribution is forecast to grow to 40-50% by 2025.
Financial Performance and Projections
Revenue and Profit Forecast
VSTECS expects a revenue growth of 7.7%, 8.6%, and 8.7% for 2024, 2025, and 2026, respectively. This growth will be fueled by increasing AI adoption and demand for consumer electronics and cloud services. The company also anticipates stable gross margins around 4.6-4.7% during this period, with net profit growth of 0.8%, 13.9%, and 13.5% over the three years, aided by gross profit increases and effective cost management.
Target Price and Valuation
UOB Kay Hian maintains a target price of HK$5.47 for VSTECS, based on a 7.3x PE multiple for 2025. Currently trading at 6.1x forward PE, VSTECS’ valuation is positioned below its historical mean from 2019-2024, offering investors a 4.4% dividend yield in 2024, projected to rise to 5.1% in 2025.
Dividend Policy and Shareholder Returns
Dividend Yield
VSTECS offers a steady dividend yield, expected to be 4.4% and 5.1% for 2024 and 2025, respectively. This yield is supported by strong cash flows and effective working capital management, with a projected payout ratio of 30%. This dividend strategy underscores VSTECS’ commitment to delivering consistent returns to shareholders.
Financial Stability
The company’s financial resilience is marked by a stable debt-to-equity ratio, decreasing from 62.2% in 2023 to an estimated 47% by 2026, reflecting robust capital management. Return on Equity (ROE) is forecast to improve from 11.0% in 2024 to 12.1% by 2026.
Competitive Landscape
Peer Comparison
Compared to China, Taiwan, and U.S.-listed peers like Digital China, Synnex Technology, and Avnet, VSTECS trades at a favorable valuation. U.S. peers have an average PE of 11.6x for 2024, while VSTECS remains at 6.7x. Additionally, VSTECS is among the few with a significant SEA market footprint, further enhancing its competitive advantage.
Conclusion
VSTECS’ focus on AI, cloud computing, and an expanding partnership with Starlink positions it well for sustainable growth. The broker’s initiation of coverage with a “BUY” recommendation and a target price of HK$5.47 reflects confidence in VSTECS’ strong market position, financial health, and potential for continued growth in the Asia Pacific region.
