Doubtful debt provisions dragged down earnings. Valuetronics Holdings Limited (VHL) reported its 1QFY10 results last Tuesday. Revenue fell 7.0% YoY (+37.3% QoQ) to HK$218.6m due mainly to a decrease in sales within the OEM segment. Net income, on the other hand, fell 74.3% YoY to HK$5.4m (but better than the 4Q09 loss of HK$2.7m) due to slightly largerthan- expected operating costs and a significant allowance for doubtful debts of HK$9.5m. This allowance relates to a customer who has been experiencing working capital distress since the economic turmoil hit in2008 and represents full provision for the customer. We also understand that VHL had previously provided a similar HK$8.7m provision for this customer in FY09. As a result of this provision, the quarterly revenue made up 27.5% of our FY10 sales estimate, while bottom line only made up 10.7% of our earnings forecast. Excluding this one-off charge, however, we note that earnings would be well within our expectation.

Coming quarter expected to remain challenging. Looking ahead, VHL expects FY10 to remain challenging and the sentiment among its customers to remain largely cautious, given the current economic climate. For 2QFY10, the group also expects to contend with issues such as demand pattern uncertainty, price pressures from customers, deteriorating credit conditions and currency exchange rate fluctuations. However, VHL reiterated that it will step up its vigilance on its working capital management, business fundamentals and its customers' financial health to mitigate any risks of inventory over-stocking and other unwanted risks from its customers (possibly again). On the demand front, it will also continue its existing business development strategies to capture new business opportunities and further expand into the US and European market.

Fundamentals still healthy; maintain BUY. We have revised our FY10 forecasts to incorporate the better-than-expected turnover and doubtful debt provisions. Accordingly, our sales estimate is now raised by 6.3% to HK$843.8m, while our earnings projection is decreased by 20.6% to HK$40.1m. Despite the softer earnings, we think that VHL's fundamentals have by far remained healthy, and that it is well-positioned to take on more orders when the global economy recovers. Applying an 8x (6x previously) FY10F EPS in anticipation of a seasonally stronger 2QFY10, our fair value is again maintained at S$0.17. Looking at an upside potential of 36%, we maintain our BUY rating on VHL.