Cowell e Holdings (Cowell) reported its 1H 2017 results, which confirmed that the Company is on arecovery trend. We believe the 1H 2017 results were well-expected, as the Company issued apositive profit alert in mid-Jun 2017, but this is the first time Cowell resumed bottom-line growthsince 2H 2015, which should provide a base for a further re-rating. Cowell management reiteratedits positive view on the outlook for the Company in 2H 2017 since a) 2H is the peak season, and b)there are high market expectations for sales of Apple’s new products. Cowell intends to developcomponents for key mobile devices as new product offerings, based on suggestions from the Company’smajor customers, and plans to capture a larger share of the growing market demand forcamera modules. The development of new products and new applications should remove marketconcerns about the medium-long-term outlook for the Company. We raise our earnings forecastsfor 2017E and 2018E by 13% and 11%, respectively, after upward revision of shipment and sellingprice assumptions. Despite its recent share price rally, Cowell is still trading at a lower valuationthan HK-listed handset component names, which we believe already reflects its client concentrationrisk. We maintain our BUY recommendation on Cowell with a new target price of HK$4.57(based on 11x 2017E PER). The increase in target price is due to using a higher PER multiple,which looks fair given the current re-rating of handset component names without major concerns.Cowell may experience post-results profit-taking given its share price rally since Jun 2017; anyshare price correction should provide a good buying opportunity. Catalysts include Apple’s quarterlyresults announcement and new product launch and Cowell’s new products development.
1H 2017 results highlights. Cowell’s 1H 2017 net profit was US$9.2m, up 252.8% YoY fromUS$2.6m in 1H 2016. The Company’s 1H 2017 turnover was US$319.4m, up 5.9% YoY fromUS$301.8 in 1H 2016. Its gross profit margin was 9.8% in 1H 2017, an improvement from8.2% in 1H 2016 and 8.4% in 2H 2016. The improvement in gross margin was due to higherproduction efficiency. In 1H 2017, Cowell sold approximately 64.6m camera module units andapproximately 42.0m optical component units, compared to approximately 59.3m cameramodules and approximately 72.8m optical component units in 2H 2016. Camera module revenuein 1H 2017 increased by 6.0% YoY, which was mainly due to a) about a 12% YoY and19% YoY increase in shipments to Apple and LG, respectively, and b) an improved averageselling price (ASP) for products for LG due to the Company’s focus on high-end products.Cowell’s experience of price erosion on products sold to Apple is not unique, as other Applesuppliers faced a similar situation in 1H 2017. Cowell declared an interim dividend ofHK$1.7179 cents in 1H 2017 vs. nil in 1H 2016.
Good start in 1H 2017. Cowell management reiterated its positive view on the outlook for theCompany in 2H 2017, since a) 2H is the peak season, and b) there are high market expectationsfor sales of Apple’s new products. The monthly turnover figures released by Apple’supstream suppliers indicate the new iPhone production has been ramping up since Jun,which also confirms Cowell management’s positive tone. Cowell is setting up an R&D centerfor new products development; in particular, the Company intends to develop components forkey mobile devices as new product offerings, based on suggestions from the Company’smajor customers, and plans to capture a larger share of the growing market demand for cameramodules. As of June 30, 2017, Cowell reported US$36.9m in unencumbered cash andcash equivalents.
Upward earnings revision. We raise our net profit forecasts for 2017 and 2018 by 13% and11%, respectively, after factoring in higher turnover assumptions. As an outperformers amongthe HK-listed TMT hardware names, Cowell may see post-results profit taking, which mayoffer a re-visit opportunity.