TUYA - Tuya: A Mixed View

2023-07-06 10:28:09 ET

Summary

• I am positive on TUYA's recent move to initiate a new $50 million share buyback program, as share repurchases are expected to be value-accretive based on Tuya's current valuations.
• But Tuya's revenue is only likely to return back to FY 2021 levels in a few years' time based on analysts' forecasts and key metrics highlighted by the company.
• I continue to rate TUYA as a Hold, given that I have a mixed view of Tuya considering both its new share repurchase plan and its financial outlook.

Elevator Pitch

My Hold investment rating for Tuya Inc. ( TUYA ) [2391:HK] shares stays unchanged. I previously published my initiation article for Tuya on November 21, 2022, discussing about the difficult operating environment for the company and what it is doing to deal with industry headwinds.

I have a mixed view of TUYA as a potential investment candidate which translates into a Hold rating for the stock. Although I like the company's recently announced share buyback plan, I have an unfavorable view of Tuya's revenue growth prospects in the near term.

All Eyes On New Share Buyback Plan

Towards the end of last month, TUYA issued a press release revealing that the company has secured the authorization from its board to initiate a new $50 million share buyback plan. As per the company's announcement, Tuya's share buyback plan "will commence on June 29, 2023, and end on the date on which a new general repurchase mandate is granted by the shareholders."

Tuya's latest shareholder capital return initiative is worthy of attention for multiple reasons.

Firstly, the size of TUYA's new share repurchase program is pretty significant. $50 million is roughly equivalent to almost 5% of Tuya's current market capitalization. TUYA doesn't pay a dividend. The stock could potentially offer a forward buyback yield of 5%, assuming that the company completes its $50 million share buyback plan within a year before its next shareholders' meeting in mid-June next year.

Secondly, this is the right time for Tuya to consider allocating a meaningful amount of capital to buying back its own shares, taking into account the stock's current valuations. Based on valuation data sourced from S&P Capital IQ , the market values TUYA at 0.35 times consensus forward next twelve months' Enterprise Value-to-Revenue, and just slight above net tangible asset value or 1.05 times trailing price-to-tangible book value now. In its press release disclosing the new share repurchase program, Tuya emphasized that the new $50 million share buyback plan will "create value" for the company's "shareholders." Considering TUYA's depressed valuations, it is easy to understand why Tuya holds the view that share repurchases will be value-accretive.

Thirdly, TUYA has substantial cash reserves that are in excess of the company's investment needs. As indicated in its Q1 2023 results release , Tuya's cash and investments amounted to $937.5 million as of end-March this year, which is slightly less than its current market capitalization of just over $1 billion. In contrast, TUYA's projected capital expenditures for FY 2023, FY 2024, and FY 2025, are $4.0 million, $5.7 million and $7.6 million, respectively as per consensus estimates taken from S&P Capital IQ . Therefore, there aren't any good reasons for Tuya to continue hoarding a large amount of cash on its books, and returning excess capital to shareholders will be the right decision to make.

In a nutshell, I have a favorable view of Tuya's new share repurchase plan.

Full Revenue Recovery Will Be A 2025 Story

In the preceding section, I highlighted TUYA's reasonably low valuation multiples. Tuya's shares are actually cheap for good reasons, as the company's top line is only expected to fully recover in a few years' time.

Specifically, the consensus FY 2023 and FY 2024 revenue projections for Tuya have been cut significantly by -46.2% and -45.2% , respectively. The current consensus financial forecasts for TUYA indicate its sales will decline by -0.3% to $207.5 million in FY 2023, before growing by +20.0% and +19.0% to $249.0 million and $296.3 million in FY 2024 and FY 2025, respectively. TUYA's FY 2021 top line was high as $302.1 million, so the company's revenue is only expected to return to close to 2021 levels in FY 2025.

TUYA mentioned a number of key metrics at its Q1 2023 results call , which implies that the sell-side analysts are right in having a cautious view about Tuya's pace of top line recovery.

One key metric relates to Best Buy's ( BBY ) top line performance and guidance. At the company's first quarter results briefing, Tuya referred to BBY's Q1 2023 top line contraction of -10.3% and Q2 2023 revenue growth guidance of -6.4% as being indicative of "stress" in "downstream retail channels."

Another key metric is the mean -10% Q1 2023 revenue decline for "12 upstream semiconductor and module companies" that TUYA is tracking. Tuya noted at its Q1 earnings call that the "upstream" component of the "consumer electronics supply chain" is still facing "sustained pressure" as evidenced by this metric.

There are also metrics relating to Tuya's survey of its own clients. TUYA disclosed that around 60% of the company's "major top-tier OEM customers" in China have chosen to "adopt a wait-and-see approach" when it comes to their growth plans for the current year.

In summary, TUYA's revenue outlook for the short term is poor.

Closing Thoughts

On one hand, Tuya has the opportunity to enhance shareholder value by aggressively buying back its own undervalued shares with its new share repurchase plan. On the other hand, TUYA will take a couple of years to achieve full revenue recovery. Considering both the positives and negatives associated with the stock, I retain my Hold rating for TUYA.

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