Valuetronics is currently a cash-rich company. It had zero debt as at end-1QFY15. Its cash position of HKD441m amounts to 48% of its market cap. With no big capex plans and only HKD40-50m in maintenance capex pa, we would expect further cash accumulation in FY3/15E-17E, if the current major uncertainty that it is facing with its biggest customer does not loom ominously ahead. 
 

However, the worst case scenario could be much worse than our current forecasts. There is a risk that Valuetronics may have to use its cash to support its customer&rsquo s mass-consumer, low-priced strategy. The customer could require it to commit more working capital to increase production and locate finished goods close to its distribution channels. Valuetronics, however, may not be able to book revenue from its increased production until this customer pulls stock from its warehouses. 

We have seen this happen before at other companies but have not yet captured the downside risk in our current forecasts for Valuetronics. Still, we caution that such a strategy is a very real possibility for its customer, as LED bulbs are homogeneous products with a long shelf life.