Tongda released its 2H17 results after the market closed on 19 Mar. Recurring NP (excluding one-off items) was down 3.6%YoY to HKD655m, 6.5% and 2.6% below our and market’s estimates respectively. This was mainly because of weaker-thanexpectedrevenue, which was due to the weakness in Chinese smartphone brands’ 4Q17 shipment momentum. This waspartly offset by stronger-than-expected GPM expansion. We continue to expect the company to see better growth this year,supported by further headway in its waterproof segment and larger adoption of glass casing solutions. We maintain our BUYrating for the stock, and put our TP and earnings forecasts under review. This is pending further comments on the outlookfrom management at a results briefing to be held at 9:00am today. Our current TP is HKD2.40 (42% upside).
　　What’s new?
　　Tongda Group Holdings (Tongda) released its 2H17 results after the market closed on 19 Mar. Highlights include:
　　i. Recurring NP (excluding one-off items) in 2H17 declining by 3.6% YoY to HKD655m, or 6.5% and 2.6% below ourexpectations and market’s estimates respectively;
ii. Reported NP grew by 14.7% YoY to HKD716m, or 6.9% below our forecasts but in line with market’s expectations;
iii. Revenue grew by 7.8% YoY to HKD4,945m, which were 6.7% and 6% below our estimates and Bloomberg consensusrespectively. This also indicated that revenue growth in 4Q17 was flat YoY (3Q17: +16.8% YoY);
iv. GPM expanded by 2.6ppts YoY to 26.5%, which was above our and market’s expectations of 24.7% and 25.3% respectively;
v. Opex to sales ratio was up by 0.3ppts YoY to 9.1%, which we believe was due to less favorable operating leverage because ofweaker-than-expected revenue.
　　Our view
　　Revenue growth was below expectations, which we believe should mainly be due to weaker-than-expected momentum of Chinesesmartphone brands in 4Q17. However, we continue to expect the momentum of these brands to improve from late 1Q18 to early 2Q18onwards. This would be driven by the launches of new products among them.
　　On the other hand, Tongda’s waterproof segment did see a solid and rapid ramp-up, achieving USD100m in revenue in FY17,representing 9% of its total revenue (FY16: 3% of total revenue). We expect this segment’s momentum to stay strong, driven by afurther allocation gain (which we expect to rise to >30% from 25-30% in the prior year’s models) and dollar content increase (~10%) inwaterproof components in the upcoming iPhone series.
　　Another driver is Tongda’s further headway with its penetration into the upcoming MacBook, which is slated for launch this year, with alikely allocation of 20%. Despite MacBook’s lower volume when compared to the iPhone, ASPs for a whole set of waterproofcomponents for the former is much higher, at least 1x higher than the latter.
　　Besides, we also expect more glass casing orders to kick in – we estimate the adoption among Chinese smartphone brands to rise to6% this year from 2% in 2017, which would be supportive towards the company’s 2018 revenue growth.
　　GPM expansion above expectations, which we believe should be due to product mix improvements, with higher contributions fromhigher-margin segments like metal casings, as well as the waterproof business.
　　Maintain BUY, but we put our forecasts and TP under review pending further comments on Tongda’s outlook from management at aresults briefing to be held at 9:00am today