L.K.Tech (558.HK)                  BUY (TP: HK$2.90 (from HK$2.47))

Staging a turnaround

L.K. Tech’s FY10 results announced last week confirmed our projection of a major turnaround. Turnover for FY10 was HK$1,408m, in line with our estimate and up by 18.1% from HK$1,193m in FY09. Net profit was HK$20.3m, beating our estimate of HK$4.8m mainly due to better than expected operating profit as a result of improved operating efficiency. Management revealed they are gaining orders for the 2H, and new products are rolling out with the additional capacity now in place. In consideration of this and the strong FY10 results, we revised our turnover forecast upward by 15.6% for FY11 and by 20.2% for FY12.  We also lift our earnings estimates by 7.7% in FY11 and 5.8% in FY12. We continue to believe L.K. Tech will enjoy strong growth owing to the rising demand for automobiles and home appliances in China. We maintain our BUY rating and raise our target price from HK$2.47 to HK$2.90. Our new price target tags to 16x FY2011 p/e and it posts a potential 51.8% upside.

Bottom line turned positive. The turnover of HK$1,408.4m for FY09 is in line with our estimate, and is up 18.1% compared to HK$1,192.5m of FY09. Gross profit increased by 25.6% to HK$382.9m and gross margin widen by 1.6ppt to 27.2% in FY10. Operating profit was HK$66.3m, 20% above our estimate of HK$55.3m mainly due to lower than expected S&D expenses. As a result, L.K Tech recorded a net profit of HK$20.3m, beating our HK$4.8m estimate by 4 times, also turned around remarkably from the loss of HK$43.7m in FY09.

We raised our turnover and profit projections. In consideration of both the strong demand from downstream customers and the strong FY10 results, we revised our turnover forecasts upward by 15.6% for FY11 and 20.2% for FY12. We also raised our earnings estimate by 7.7% for FY11 and 5.8% in FY12.

Maintain BUY with new TP of HK$2.90. We remain upbeat on this company and reiterate our BUY rating. We also revised our TP from HK$2.47 to HK$2.90. Our new price target tags to 16x FY2011 p/e and it posts a potential 51.8% upside.