Innovative to tune in to auto accessories and antennae in US
INNOVATIVE International designs, manufactures, and markets antennae and auto accessories. Car radio and cellular telephone antennae are the company's core products, accounting for about 40 per cent of total sales last year. Products are distributed both overseas and locally, including in China. Geographically, Europe is Innovative's most important market and the company has tended to concentrate its business there rather than in the United States.
However, the company plans to penetrate the US market more aggressively, believing it can capitalise on the American value-for-money consumer trend. Major US retailers now carry Innovative's lines and the company continues to scout for distributors that can market its products on a private-label basis.
During the last four years, earnings from its non-core businesses have climbed from nil to 40 per cent of total pre-tax profits. This sharp increase was attributed to gains from sales on property developments as well as trading of merchandise.
But brokerage Vickers Ballas considers these earnings of low quality due to the cyclicality of the property market and uncertainty over possible regulatory changes in China.
The company's special status with the Tianjin government could also change, although Innovative is likely to maintain close ties with influential authorities.
Although the company believes the risk of regulatory changes is minimal and the outlook for its non-core businesses remains good, it is gradually shifting emphasis back to its core manufacturing business.
Vickers' earning forecast points to a lower reliance on non-core businesses in coming years, and US sales should continue to grow. The earnings quality of non-core businesses will also improve.
Antenna sales will rise again this year as the company concentrates on both the replacement market and auto manufacturers. The cooler box division has experienced strong demand from the European market and should also begin to see a healthy pick-up in US sales. New products, including electric hand tools and batteries, will contribute significantly from next year.
Based on prospective net profit growth of about 40 per cent per annum until the 1997 fiscal year, Vickers believes the counter to be sharply undervalued at about nine times fully diluted estimated earnings for the financial year ended March 1994, and about seven times the current year forecast.
