Company Reports

We lowered our fair value estimate on narrow-moat Advantech to TWD 290 per share from TWD 337, given another quarter of downbeat guidance, more-intense competition, and uncertainty in its plan to acquire point-of-sale machinemaker Aures. Our valuation corresponds to 27.4 times 2024 P/E, close to the stock’s five-year average. We are less bullish than the market on Advantech’s ability to capture incremental China customers in industrial automation, and generative artificial intelligence is unlikely to benefit the company’s bottom line. Our earnings per share compound annual growth rate up to 2028 is now 8% instead of 10.2%.

We think Advantech’s dominant position in the IPC industry and reputation for providing reliable products and after-sales services give it a head start in offering next-generation industrial solutions, interconnected equipment and Internet of Things services. We believe Advantech’s two-pronged strategy of developing Internet of Things platforms and investing in Internet of Things service firms, reinforces its commitment to integrating hardware and services, differentiating itself from peers. Advantech’s revenue CAGR until 2028 is projected at 11%, with 70% of growth to come from Asia’s growing demand for robotics and industrial automation, 20% from potential new business in the U.S. and the remaining 10% from IoT offerings.

We retain our fair value estimates on Taiwanese technology companies in our coverage following a powerful earthquake and multiple strong aftershocks near the eastern city of Hualien on April 3, namely: Advantech at TWD 337; Delta Electronics at TWD 331; GlobalWafers at TWD 710; Largan at TWD 3,000; MediaTek at TWD 1,400; Sino-American Silicon at TWD 281; Taiwan Semiconductor Manufacturing Co at TWD 950 (USD 151 per ADR); United Microelectronics Corp at TWD 70; and Win Semiconductors at TWD 245 per share.

We cut our fair value estimate on narrow-moat Advantech to TWD 337 per share from TWD 361, as downbeat guidance points to a slower recovery in 2024 than we foresaw and rising operating expenses needed to broaden the firm's product portfolio will weigh on profitability. Our valuation corresponds to 27.3 times 2024 P/E, close to the stock’s five-year average. We reckon Advantech's shares are overvalued, as the market’s expectations for generative artificial intelligence, or AI, are too high, and we believe it is unlikely to benefit the company directly. While AI can be deployed in detection and some production tasks, we believe it is already reflected in our 10.2% earnings per share compound annual growth rate, or EPS CAGR, up to 2028.

We think Advantech’s dominant position in the IPC industry and reputation for providing reliable products and after-sales services give it a head start in offering next-generation industrial solutions, interconnected equipment and Internet of Things services. We believe Advantech’s two-pronged strategy of developing Internet of Things platforms and investing in Internet of Things service firms, reinforces its commitment to integrating hardware and services, differentiating itself from peers. Advantech’s revenue CAGR until 2028 is projected at 11%, with 70% of growth to come from Asia’s growing demand for robotics and industrial automation, 20% from potential new business in the U.S. and the remaining 10% from IoT offerings.

We maintain our TWD 361 fair value estimate for narrow-moat Advantech after the company’s third-quarter bookings rebounded slightly thanks to a recovery in industrial Internet of Things in China. Advantech’s upside is limited, as long-term potential in the retail, energy, industrial, and healthcare sectors is priced in and increased research and development spending may dent profitability in the next two to three years.

We trim our fair value estimate on narrow-moat Advantech to TWD 361 per share from TWD 378.22 (adjusting 1-for-10 scrip dividend) after the firm posted disappointing second-quarter bookings and third-quarter outlook, citing sluggish demand in several areas. Advantech’s upside is limited as long-term potential on retail, energy, industrial, and healthcare sectors are priced in and factory investments remain sluggish in China.

We think Advantech’s dominant position in the IPC industry and reputation for providing reliable products and after-sales services give it a head start in offering next-generation industrial solutions, interconnected equipment and "Internet of Things" services. We believe Advantech’s two-pronged strategy of developing Internet of Things platforms and investing in Internet of Things service firms, reinforces its commitment to integrating hardware and services, differentiating itself from peers. Advantech’s revenue CAGR until 2027 is projected at 11%, with 70% of growth to come from Asia’s growing demand for robotics and industrial automation, 20% from potential new business in the U.S. and the remaining 10% from IoT offerings.

We retain our fair value estimate for Advantech at TWD 416 per share after the company reported upbeat first-quarter results as bookings data is consistent with our prior view that China should see a recovery in the second half. Advantech is undervalued in our view, as weak bookings should improve after the first quarter amid improving sentiment by industrial PC and Internet of Things customers. We believe the market is underestimating Advantech’s focus on retail, energy, industrial, and healthcare sectors.

We raise our fair value estimate on Advantech to TWD 416 per share from TWD 362, after reducing operating expenses forecasts up to 2027 as we foresee more streamlined operations following the company’s reorganization. Our fair value estimate corresponds to 27 times 2023 P/E. Advantech is undervalued, in our view, as recent lukewarm bookings lead to investors overlooking its 17% five-year EPS CAGR. We believe Advantech’s Internet of Things, or IoT, offerings can ride on China’s recovery later this year and the increase in interconnectivity in the retail, industrial and healthcare sectors.

We think Advantech’s dominant position in the IPC industry and reputation for providing reliable products and after-sales services give it a head start in offering next-generation industrial solutions, interconnected equipment and "Internet of Things" services. We believe Advantech’s two-pronged strategy of developing Internet of Things platforms and investing in Internet of Things service firms, reinforces its commitment to integrating hardware and services, differentiating itself from peers. Advantech’s revenue CAGR until 2027 is projected at 11%, with 70% of growth to come from Asia’s growing demand for robotics and industrial automation, 20% from potential new business in the U.S. and the remaining 10% from IoT offerings.

We retain our fair value estimate for Advantech at TWD 362 per share, corresponding to 26 times 2023 P/E, after factoring in modest demand slowdown in early 2023. Advantech has become undervalued in our view, as weakness in China has pushed the book/bill ratio to 0.87, hurting near-term sentiment. Although China has been weak for longer than we anticipated, we still believe Advantech benefits from a long-term trend where factories and other commercial premises become more interconnected. We are starting to see pandemic control policies ease in parts of China, and more of these moves should quell the market’s concerns on Advantech’s exposure in the country.

We nudge our fair value estimate on Advantech up to TWD 362 per share, corresponding to 24 times 2023 P/E, after minor reductions in 2022 operating expenses. Advantech is fairly valued in our view, as China lockdown risk and slowing orders are short-term headwinds, and the integration of industrial Internet of Things, hardware and software, are yet to scale. We are marginally more positive after management shed more light on their plans. We believe a short-term catalyst will be a rebound in book/bill ratio, especially in the September figures to be released in early October.

We think Advantech’s dominant position in the IPC industry and reputation for providing reliable products and after-sales services give it a head start in offering next-generation industrial solutions, interconnected equipment and "Internet of Things" services. We believe Advantech’s two-pronged strategy of developing Internet of Things platforms and investing in Internet of Things service firms, reinforces its commitment to integrating hardware and services, differentiating itself from peers. Advantech’s revenue CAGR until 2026 is projected at 13%, with 70% of growth to come from Asia’s growing demand for robotics and industrial automation, 20% from potential new business in the U.S. and the remaining 10% from IoT offerings.

We keep our fair value estimate on Advantech at TWD 357 per share, corresponding to 28 times 2022 P/E, close to the company’s five-year average. Advantech is fairly valued in our view, as reopening outside of China remains on track and the benefits of integrating software with industrial Internet of Things platforms may take longer to surface. Near-term upside catalysts of the stock mainly come from unexpected easing in component supply. Separate disclosure of non-hardware revenue may boost investor confidence (and the stock price) by addressing the difficulty to track how Advantech executes its non-hardware industrial Internet of Things vision, a concern shared by us.

We think Advantech’s dominant position in the IPC industry and reputation for providing reliable products and after-sales services give it a head start in offering next-generation industrial solutions, interconnected equipment and "Internet of Things" services. We believe Advantech’s two-pronged strategy of developing IoT platforms and investing in IoT service firms, reinforces its commitment to integrating hardware and services, which differentiates itself from peers. Advantech’s revenue CAGR until 2026 is projected at 13%, with 70% of the growth to come from Asia’s growing demand for robotics and industrial automation, 20% from potential new business in the U.S. and the remaining 10% from IoT offerings.

We raise our fair value estimate to TWD 357 per share after slightly nudging down operating expenses and a slightly more upbeat long-term industrial Internet of Things, or IIoT, outlook as Advantech redoubles non-hardware IoT efforts. The fair value estimate corresponds to 28 times 2022 P/E, close to the company’s five-year average. Advantech is fairly valued in our view, as reopening prospects are priced in and the benefits of integrating several IIoT platforms may take longer to surface. Near-term upside catalyst of the stock mainly comes from unexpectedly fast customer acquisition in the IIoT segment.

We think Advantech’s dominant position in the IPC industry and reputation for providing reliable products and after-sales services give it a head start in offering next-generation industrial solutions, interconnected equipment and "Internet of Things" services. We believe Advantech’s two-pronged strategy of developing IoT platforms and investing in IoT service firms, reinforces its commitment to integrating hardware and services, which differentiates itself from peers. Advantech’s revenue CAGR until 2025 is projected at 13.9%, with 70% of the growth to come from Asia’s growing demand for robotics and industrial automation, 20% from potential new business in the U.S. and the remaining 10% from IoT offerings.

After factoring in structurally lower operating expenses and lower near-term gross margin outlook in view of higher component costs, we modestly raise our fair value estimate by 4% to TWD 339 per share. The fair value estimate corresponds to 27 times 2022 P/E, close to the company’s five-year average. We view the stock as fairly valued, as the prospects from post-coronavirus reopenings are priced in, underpinned by high book/bill ratios in the past 12 months. We think lower operating expenses are made possible by a simpler corporate structure, with Advantech merging some of its subsidiaries; and a shift toward online marketing. Possible upside catalysts of the stock are better-than-expected supply chain easing, plateauing of semiconductor costs and significant adoption of its WISE-PaaS automation platform.

After factoring in a strong second-half outlook powered by a more certain post-pandemic recovery and more positive industrial automation assumptions, we increase our fair value estimate to TWD 327 per share from TWD 304 per share previously. Advantech’s long-term drivers center around industrial automation in China, and sales of specialized modules for retail, logistics, smart city, and healthcare globally. Although we are confident in Advantech’s long-term thesis, we view the stock to be overvalued as the market appears to be too optimistic on Advantech’s gains from the Biden infrastructure bill and has underestimated the risks in promoting its WISE-PaaS platform in our view.