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3Q Result Review

LEGEND HOLDINGS (0992.HK)

BUY HK$21.40 (HSI 15,427)

Manufactures PCs and related products, motherboards, distributes PCs products and
provides systems integration services.

12mth High/Low

HK$23.40/ HK$2.65
Daily T/O (3mth)
HK$70.5m
Issued Shares
1789m
Market Cap.
HK$38,295m
Free Float Est.
39%
Major Shareholder



New Tech


61%
Book NAV Mar/99
HK$1.83
ROAE 99
16%
Price to Book
11.7x
ROCE 99
11%
Gearing Ratio
6.30%
5 Yr.Av.PER
28.7x
SC Risk Reward Ratio


9.5%/9.3%
Rel. to HSI
1mth: 13.6%
3mth: 180.8%
12mth: 623.1%


(Analysis ¡V Full Cover)


Summary of Forecast

Year Ended 31 Mar
98A
99A
00F
01F
Turnover (HK$m)
7,995
11,633
16,502
22,256
Net Profit (HK$m)
205
275
430
587
Cons. EPS (HK$)


0.216
0.278
EPS (HK$)
0.124
0.159
0.247
0.337
EPS (ƒ´%)
NA
28
55
36
PER (x)
173
135
87
64
DPS (HK$)
0.015
0.03
0.06
0.08
Yield (%)
0.1
0.1
0.3
0.4
Analyst Revisions


4/0
5/1



3rd Quarter Results

3 Months Ended 31 Dec
3Q99A
3Q00A
ƒ´%
Turnover (HK$m)
3,478
5,091
46
Operating Profit (HK$m)
94
151
61
Net Profit (HK$m)
93
147
59
EPS (HK$)
0.052
0.081
56
DPS (HK$)
0
0
0



Previous Forecast

Year Ended 31 Mar
00F
01F
Turnover (HK$m)
15,547
21,825
Net Profit (HK$m)
384
523
EPS (HK$)
0.22
0.296
Difference (ƒ´%)
12.3
13.9


¡@
Price Chart




Impact ¡V 3Q results beating expectations

Price Target ¡X HK$24.70(3mth) HK$30.00(12mth)

Legend Holdings released its 3rd quarter result, with net profit up 59% to HK$147m. We are
pleased with the results and revise up our FY00 and FY01 earnings forecast by 12.3% and
13.9%, respectively. We, therefore, revised up our target prices accordingly.

The tremendous rise in 3Q earnings was mainly attributed to stronger sales and lower interest
expense. Net margin improved to 2.88% in 3Q00 from 2.67% in the same period last year
(1H00: 2.36%).

Legend PC accounted for 53% of total turnover, rising from 49% in 1H00. This was attributed to
a 60% growth in commercial PCs and 90% growth in home PCs. Legend sold 430,000 PCs in
3Q00. In addition to the sales of 610,000 PCs in 1H00, Legend sold 1.04m PCs for the first
nine months ended 31st December 1999. Hence, we further raise our full year sales projection
from the original 1.3m PCs to 1.4m PCs (we had raised from 1.2m PCs to 1.3m in the interim
results note). However, the gross margin dropped from 13.0% to 12.5% in the period under
review (1H00: 13.1%).

Regarding the new internet PC, Legend sold 14,000 Conet PCs in December 1999. Gross
margin of Conet PC is around 20%, which is higher than that of the ordinary PCs. The
management expects that sales of Conet PC will account for 15% of the total PCs in FY01.
The management is also satisfactory with the sales performance of the newly-launched set-top
box.

The current market share of Legend PCs is above 25%, up from 22.9% unveiled in the interim
results. Despite the surge in component cost due to the shortage of supply, Legend kept the
selling prices of current models unchanged.

Distribution recorded a 59% growth in turnover, accounting for 33% of total turnover. Gross
margin stayed unchanged at 8.5% compared to 3Q99 (1H00: 8.9%). Notebook marked the
strongest growth of 222%.

Systems Integration accounted for 6% of turnover. Turnover in SI dropped slightly compared to
the same period last year due to some adjustments made on the business and personnel
management. Gross margin stayed at 19.0% (1H00: 19.5%). Motherboard accounted for 5% of
turnover and gross margin improved to 22.0% (1H00: 17.0%), due to the reduction in
headcount and inventory days from 60 to 45 days. We expect the division to break even in
FY00.

Net interest bearing borrowing was reduced to HK$208m compared to HK$514m in the same
period of the previous year. Inventory days shortened to 23.5 days from 36.9 days following the
application of e-commerce on inventory control and Legend continued to enjoy tax privileges on
some products. Currently, the gearing ratio is 6.3% and interest coverage is 16.6x.


Conclusion

Following the earnings upgrade, we reiterate our optimistic expectation on the future PC sales.
Additionally, the counter should be granted a premium for its ISP and ICP potentials. Given a 2-year
CAGR of 45% for FY00-01, our targeted valuations of 90x FY01 PER and 2.0x PER/growth ratio are
still justified for such a high growth company. We maintain our BUY recommendation, with a
12-month price target of 30.00 (90x FY01 PER).


Research Department +852 2820 6407
Email kenneth.lau@south-china.com




IMPORTANT : This report and the information and opinions provided or expressed herein have been prepared by South
China Research Limited for itself, its parent, holding, subsidiary or other associated companies for the information of its or
their respective clients only, and has been compiled with reasonable care using data, information or sources believed to be
true, reliable and accurate at the time of publication. No representation or warranty whatsoever, whether express or implied,
is or are made as to the accuracy or completeness or otherwise of this report or any of the contents thereof. South China
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representatives or employees accordingly do not accept any responsibility or liability whatsoever for any direct or
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solicitation for the purchase or sale or other dealing in the shares, stocks or other securities mentioned herein.
MARKETwatch
HSI ¡V 15,427.72 (+324.68)


MARKET COMMENTS

Having found support at 15,000, the HSI rebounded strongly, led by China Telecom, C&W
HKT, Hutchison and Cheung Kong. The latter two were boosted by news that Hutchison is
forming an Internet joint venture with US Priceline.com. Banking and property stocks were also
stronger as the market has largely priced in a 25 basis point rise in US rates next month. Pacific
Century Cyberworks rose 7% following its joint venture with CMGI in the US. With buying
interest re-emerging, we think the market is likely to go up further today.


RESULTS REVIEW

Legend Holdings (992) FULLY VALUED

$21.40

Legend reported a 58% increase in net profit on a 46% increase in turnover for the three months
ended December, totalling $320.8mn for the first three quarters. The results were significantly
above market consensus. As a result, we have revised up our FY00 earnings forecast by 9% to
$405mn. Although analysts are likely to revise up their earnings forecast for Legend and this will
support the share price, we believe that Legend is fully valued at current levels.

PC Market Share Continued To Improve. Legend PC was the major earnings contributor, as
sales shot up 78%. Sales for commercial and home PCs surged 60% and 90% YoY respectively.
For the first-three quarters, Legend sold 1.04mn computers, in line with its year-end target of
1.2mn units. Management estimates that Legend PCs¡¦ market share increased to over 25% in the
4Q of 1999, from 22.9% in the 3Q according to IDC. However, gross profit margin decreased
from 13.1% in the first half to 12.5% due to shortage of components.

Conduct Business Through The E-Commerce System. Inventory turnover cycle improved
further from 30.1 days in 1H to 23.5 days. We believe that the improvement can be attributable
to the e-commerce system launched in 1Q00. Currently over 80% of sales of Legend PCs are
handled by the E-commerce system that is connected to 300 key distributors and dealers.

SI Business Under-Performed. In the 3Q, sales in SI dropped 33% to $305mn. According to
the management, Legend has made some personnel changes for streamlining the business.
However, results of the operation are likely to be affected in the short term.


Profit Forecast

Y/E Mar
Net Profit
EPS
EPS
PER
DPS
Yield

($mn)
($)
Gr.(%)
(x)
($)
(%)
1998
205.2
0.125
-
-
0.015
-
1999
275.3
0.159
27.1
134.7
0.05
0.2
2000F
405
0.229
43.9
93.6
0.065
0.3
2001F
532.6
0.297
29.6
72.2
0.065
0.3
2002F
645.3
0.359
21.2
59.6
0.065
0.3


Source: Dao Heng Securities estimates









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