Lotes Co, incorporated in 1986 in Keelung City Taiwan has been designing and manufacturing precision electronic interconnect components and hardware, supplying quality products at competitive prices to the worldwide industry which creates and develops state-of-the-art electronic products, instruments, and systems. The company with its proficiency and expertise in the industry has managed to secure over 3000 patents, which is a strong testament to their success. With geographic representation being concentrated in a few regions, the company managed to derive around 73% of its revenue from Mainland China and approximately 12% from Taiwan, with the rest 15% generated from other countries.

Gradual growth of the overall ICT industry

The performance of the ICT industry is expected to improve in 2025 due to the rise in generative AI applications and improved AI server visibility, which have increased the demand for cloud-based network products. Additionally, the stable global economy has led to stabilized demand for consumer electronics. Smartphone accounts for the largest market share in consumer electronic products, and according to Canalys, they are showing signs of stability, with shipments expected to grow by 4% to 1.17bn units in 2024. The Company believes that the performance of this product category to be stable in 2024.

In the area of cloud network products, large-scale cloud companies are expected to purchase general-purpose servers again after an 18% YoY slump in server shipments in 2023. Accordingly, DIGITIMES Research expects overall server shipment to grow this year, benefiting from core competitiveness in the field of AI servers, including key technology R&D capabilities, a highly digital manufacturing platform, complete vertical and system integration capabilities, and deep cooperation with customers. Additionally, In the field of computer terminal products, Canalys projects PC shipments to grow 8% YoY in 2024, as the PCs sold during the pandemic will enter the trend of replacement, coupled with the launch of AI-enabled PCs.

Financial performance characterized by industry movements

Revenue has been on an increasing trajectory with a 5-year CAGR of 12.9% for the 2019-2023 period, with around 24% YoY growth in 2021 and 27% YoY growth in 2022. The uptick during 2021-22 was supported by the ICT industry as a whole, which enjoyed a positive momentum during the COVID-19 period, with increased demand for computers and electronic devices. On the revenue front, Lotes Co fared better compared to its peers, Gold Circuit Electronics and Hon Hai Precision. Gold Circuit clocked a revenue CAGR of 7.8%, while Hon Hai Precision reported a CAGR growth of 3.1%, during the same period.

The company’s operating profit increased at a CAGR of 28.5% over the last five years, with margins expanding by over 10% reaching 28.4% in 2023. Lotes Co generated consistent positive FCF over the last three years, reaching TWD5.2bn in 2023. Consequently, cash and short-term investment jumped 5x to TWD13.2bn, during the same period. Shareholder’s equity more than doubled to TWD29.4bn in 2023 compared to TWD12.6bn in 2019, with ROE increasing to 21.3% from 19.1%.

Favourable valuation with a positive outlook in sight

The stock of the company increased by over 90% in the last 12 months, boosting the company’s valuation. Currently, Lotes Co is trading at a P/E ratio of 24x, which is higher than its 5-year average of 19x, and the local peers Gold Circuit at 20x and Hon Hai Precision at 16x. However, it is in line with the global peer average of 26x. Additionally, on an EV/EBIT basis, the company is trading at 19x, which is higher than the 5-year average of 14x and above the local peers Gold Circuit at 13x and Hon Hai Precision at 11x, but in line with the global peer average of 20x.

Out of the 12 analysts covering the stock, eight have a ‘Buy’ call, with an average target price of TWD1,998, indicating an upside potential of around 7%. Additionally, analysts expect the revenue to grow over 18% CAGR over the next three years, while operating profits are projected to grow at a CAGR of 30%, with substantial margins expansion of 900bps to reach 37% in FY27 from 27% in FY24.

With its aim to be the most reliable strategic partner, Lotes Co. has maintained a strong performance despite having a slight setback in 2023 with the industrywide downturn and is projected to continue the positive momentum in the projected years, as per analyst forecasts. However, the industry is prone to risks on the inflation front which could impact their demand levels and thus affect the top-line. Further, economic downturns combined with supply chain issues could create disruptions in the overall progress and hamper the positive momentum of the company.