Valuation attractive, with most bad news baked in
We maintain Buy, given the attractive valuation (8x PER, with 18% EPS CAGRand 20%+ ROE) and a favorable risk/reward profile. Weak 1H17 results shouldhave been priced in; management’s 2H17 outlook is generally in line, but betterthan feared. Tongda believes it will return to the growth track in 2H17, drivenby ASP increase/market share gains for iPhone’s waterproof parts, andlaunches from Chinese handset clients.
Weak 1H17 results, in line with negative profit warnings (on Aug 6)
Tongda reported 1H17 EPS of HKD0.049 (-24% YoY; -53% HoH) and operatingprofit of HKD464m (-7% YoY; -42% HoH) on sales of HKD3.6bn (+12% YoY;21% HoH). 1H17 results are largely in line with the firm’s negative profitwarning(issued on Aug 6), owing to 1) A/R impairment loss (mainly, fromCoolpad), 2) rising R&D expenses (for iPhone’s waterproof parts in 2H17) and3) some project delays from key clients. Huawei/Xiaomi/Oppo, the top threesmartphone casing clients, account for 25%/19%/5% of Tongda’s sales.
Set to rebound in 2H17: ASP increase in metal casing
Tongda is confident that the worst is over, and it will be back on the growthtrack in 2H17. The firm highlighted: 1) metal casing shipment guidance willreach 80m (~35m has been shipped in 1H17), up from ~60m in 2016, 2) ASPcould rise from RMB60-65 in 1H17 to RMB65-70 in 2H17, due to betterproduct mix (less low-ASP Hongmi phones, and more mid/high-end projectsfrom Chinese clients and Asustek, 3) opex ratio and non-op loss will bereduced in 2H17 (high R&D and impairment loss in 1H17 are one-off). Giventhe 1H17 miss, Tongda reduced its 2017 sales guidance from 20%+ YoYgrowth to 10%+ YoY, but kept the GPM guidance unchanged (mild YoYincrease due to better product mix)
Valuation and investment risks
We fine-tune our earnings model but leave EPS largely unchanged. We alsokeep our target price of HKD2.5 unchanged, still based on 12x PER (2017-18Eaverage EPS), in line with the regional peers’ trading average. Downside risksinclude: market share loss to Chinese OEMs, ASP decline due to competition,and weak iPhone demand.