Advantech’s 2030 Sales Target Bolsters Our Long-Term Confidence; Shares Cheap Amid Weak Bookings

We raise our fair value estimate on Advantech 2395 to TWD 416 per share from TWD 362, after reducing operating expenses forecasts up to 2027 as we foresee more streamlined operations following the company’s reorganization. Our fair value estimate corresponds to 27 times 2023 P/E. Advantech is undervalued, in our view, as recent lukewarm bookings lead to investors overlooking its 17% five-year EPS CAGR. We believe Advantech’s Internet of Things, or IoT, offerings can ride on China’s recovery later this year and the increase in interconnectivity in the retail, industrial and healthcare sectors.

Management targets USD 5 billion (TWD 150 billion) in revenue by 2030, implying an eight-year top-line CAGR of 10.2%, close to our five-year CAGR of 10.7%. To achieve this, Advantech is moving to a sector-driven growth model, which we perceive as designing future offerings like healthcare and robotics needs instead of hardware. The company plans to complete reorganization by 2025 by separating principal IoT segments from regional corporate functions. The latter will focus on supporting functions (like legal) and mergers and acquisitions. Our top-line CAGR does not depend on the reorganization successfully enhancing per-head financial performance, but we are wary of short-term confusion in internal accountability and external communication. We are cautiously optimistic that the reorganization will reduce overlaps in responsibilities and increase efficiency in the long run, which underlies our lower operating expense estimates.

Revenue, gross margin, and operating margin guidance for the first quarter of 2023 are TWD 16.9 billion, 38%, and 17.5% at their respective midpoints. The numbers are either flat or slightly down from the previous quarter as product mix is little changed, and Advantech is fulfilling orders placed as early as mid-2022.