Growth Momentum To Improve Going Forward
Despite a weak 2017, we expect Tongda’s growth momentum to improve,with recurring earnings projected to rise by 21% YoY in 2018, mainlydriven by the wider adoption of glass casing solutions （which have higherASPs compared to metal casing solutions） among Chinese smartphonebrands from this year onwards, and the company gaining further headwayat its waterproof segment. Maintain BUY with a slightly lower TP ofHKD2.30 （from HKD2.40, 29% upside）， as we trim our recurring earningsforecasts for 2018-2019 by 8-13% respectively to factor in higher opex.
More meaningful contributions from glass casing solutions from this yearonwards. We estimate that the adoption rate among Chinese smartphonebrands would rise to 6% this year from 2% last year. Given higher ASPs （67-200% higher vs Tongda’s metal casing division’s blended ASP）， we expect thetrend to be supportive of the company’s revenue growth going forward.
Gaining further headway at the waterproof & other smartphone internalcomponents segment:
i. Firstly, this segment experienced solid and rapid ramp-up, achievingUSD100m in revenue last year, representing 9% of Tongda’s total revenue（2016: 3% of total revenue）；
ii. We expect this segment’s momentum to stay strong, mainly driven byfurther allocation gains （which we expect to rise to 30-35% from 25-30% inprior year’s models） and also an increase in dollar content （at least ~10%due to the extension of supply to other internal components） in theupcoming iPhone series;
iii. In addition, Tongda made further headway in its penetration into theupcoming MacBook, which is slated for launch this year, with a likelyallocation of at least 20%. Despite MacBook’s lower volume whencompared to the iPhone, the ASP for a whole set of waterproofcomponents for the former is much higher （at least 1x higher）；iv. As a result, we expect this segment’s revenue to continue ramping uprapidly by 86% YoY to HKD1.5bn. Its contribution to total revenue shouldalso rise to 15% this year, from 9% last year, based on our estimates.
GPM continues to expand, mainly driven by continued efforts to automate andproduct mix improvements （higher-margin segments like glass casing solutionsand waterproof & other smartphone internal components continue to growrobustly）。 We also expect better cost control this year, leading to slightly betteroperating leverage.
Maintain BUY. Our new TP is based on our DCF valuation, implying c.11x2018F P/E, close to 1SD above its 3-year forward mean. The stock is currentlytrading below its 3-year forward mean, which is attractive in our view, given thecompany’s better growth momentum ahead. Key risks include a slowdown inshipments and stronger-than-expected competition.