Advantech Earnings: Disappointing Bookings but We Like Steps To Enhance Energy and EV Offerings

We trim our fair value estimate on narrow-moat Advantech 2395 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.

Lackluster revenue outlook (negative 18% year on year, negative 11% sequentially) and second quarter’s 0.79 book/bill ratio led us to slash 2023 revenue and EPS forecasts by 14% and 17%, respectively; followed by 9% and 16% for 2024. Revenue, gross margin, and operating margin guidance for the third quarter of 2023 are TWD 15.2 billion, 39.5%, and 17% at their respective midpoints. Despite the downward revision, our 2022-27 EPS CAGR estimate remains at 11% assuming a robust recovery in 2024 and 2025, and Advantech will continue to benefit from growing automation needs in retail, energy, industrial, and healthcare sectors.

While inventory correction is ending, there are two weaknesses in second half of 2023. Advantech’s inventory as of June reverted to mid-2021 levels at TWD 11.6 billion, and management added distributors have cleared excess inventory. One weakness is industrial Internet of Things demand in China, where factories are pausing upgrades due to macro weakness. Another weakness is that IoT service suffers from short-term minor setbacks in retail and healthcare equipment, due to inflation easing more slowly than expected in Europe.

Advantech voiced two long-term initiatives, and we are cautiously optimistic on them. The first is reorganizing energy management products under the iEMS moniker, and expanding its offerings. It helps corporate customers monitor energy usage and supports automated energy-saving implementations. Advantech touts iEMS will add chatbots to suggest maintenance procedures based on sensor and manually input data.