TECHTRONIC INDUSTRIES(00669.HK)：MILWAUKEE’S RESILIENCE CAN ONLY DAMPEN THE EFFECTS OF DECLINING CONSTRUCTION INVESTMENT "REDUCE"-格隆汇

机构：国泰君安国际
研究员：Muyang Zhao

　　We downgrade to "Reduce", and decrease our target price to HK$91.60. We decrease Techtronic Industries’ (the "Company") 2024-2026 shareholders' net profit forecasts to US$1,020 mn (-6.0%), US$1,091 mn (-7.6%), and US$1,210 mn (-3.9%), respectively. We forecast earnings per share in 2024-2026 to be US$0.558 (-5.5%), US$0.595 (-7.5%), and US$0.659 (-3.8%), respectively. Our target price represents 21.0x, 19.7x, and 17.8x 2024-2026 PE ratio, respectively, and 3.4x 2024 PB ratio. We believe that the stock has fully priced in the resilience of the Milwaukee power tool business against the decline in U.S. construction industry investment, therefore we reduce our TP to HK$91.60.
　　Interim earnings call focuses mostly on developments in Milwaukee business, emphasizing the resilience of its high-end power equipment in recessions. In 1H2024, the Company’s flagship Milwaukee business’s revenue increased by 11.2% YoY in local currency. The Company plans on integrating state-of-the-art technology into its products such as motion tracking, posture analysis, data encryption, and interconnectivity between devices, thereby making its products safer to use and better fitting the needs of its corporate customers. The Company expects its gross margin to continue to increase as it leverages trends in AI, but will continue to reinvest its proceeds into R&D to improve its products.
　　The Company has been consistently reducing inventory and debt in preparation for lower sales growth in the US construction industry. The Company has increased its working capital efficiency, with working capital as a percentage of sales increasing 4.1 ppts YoY to 18.7%. In June, the residential and non-residential construction investment posted YoY growth rates of 7.3% and 5.3%, respectively, down from 8.1% and 6.4% in May. The Company’s revenue in the US market is unlikely to increase in 2H2024.
　　The Company’s global performance was well balanced across geographies. The Company’s sales in North America increased 5.6% YoY in local currency. Sales in Europe grew 7.9 % YoY in local currency. Sales in rest of world, featuring Australia and Asia, delivered 13.0% growth YoY in local currency.
　　Risks: Interest rate risk coming from monetary policy, geopolitical friction.