Advantech Earnings: Solid Execution in Energy, Healthcare, and Retail; Bookings May Have Bottomed

We retain our fair value estimate for Advantech 2395 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.

Revenue, gross margin, and operating margin guidance for the second quarter of 2023 are TWD 17.3 billion, 38.5%, and 18% at their respective midpoints. The numbers are slightly down from the March quarter owing to industrial IoT, a high-margin segment, being slowed by China’s milder-than-expected reopening. Management has no plans to change pricing on most of its products.

First-quarter 2023 results are ahead of management guidance and our expectations. Revenue increased 1.2% sequentially to TWD 17.4 billion. Gross and operating margins were 39.7% and 20.1% respectively, up 0.9 and 2.5 percentage points from the December quarter. The upbeat numbers were due to faster clearing of backlog and freight and raw material costs normalizing to prepandemic levels. Firmwide book/bill ratio was 0.82, down under 0.1 from a quarter ago. Although results are encouraging, we make no change to our forecasts as weak manufacturing data from China raises concerns about the extent of its recovery in the second half, and low bookings suggest uncertain demand in Europe and North America.

There is little news on longer-term initiatives, as the company already shared in March its 2030 sales target of USD 5 billion (eight-year CAGR: 10.2%). Advantech added that it expects 7%-8% CAGR from industrial PCs up to 2030, and the company to outpace the industry average by bundling nonmanufacturing offerings, like its existing smart retail and medical solutions.