A decent start for 1Q18 driven by handset clients; Expects increasedcontribution from IMT uni-body and 2.5D glass casings
Tongda announced in end April that its 1Q18 revenue grew 4.5% toHK$1,864mn, in which ~67% came from handset business. The decent start in1Q18 was driven by 17.4% Yoy increase in its top 5 clients’ revenue （which webelieve to be mainly from handset clients including Xiaomi and order ramp upof new clients such as Nokia）。
Management maintained FY18E handset casing guidance unchanged at~100mn units （vs. 85mn in FY17）， in which ~70% came from metal （would face~5% ASP downside in FY18E）， 10% from glass casings （vs. low single digit inFY17） and the remaining 20% from IMT casing （vs. low-single digit in FY17and recently being adopted in Oppo A79）。 With In-Mould Transfer （IMT）uni-body casing ASP ~50% lower than that of 2.5D glass+ metal middleframes, we expect it would be adopted by Chinese leading smartphonebrands’ mid-range handsets. We still expect GM to expand in FY18E/19E,thanks to increasing contribution from waterproof/shockproof/dustproofcomponents, increasing contribution from high margin IMT uni-body casing（GM :~30%） and gradual adoption of 2.5D glass+ metal middle frames （GM:25-28%）。
Waterproof/Shockproof/dustproof continue to ramp up in FY18E; 2.5Dglass+metal mid-frame dominates glass casing sales volume in FY18E
With ~20-25% share allocation in FY17, and though facing a slowdown in1H18 （due to lukewarm demand for US client flagship smartphone and to waitfor new flagship in 3Q18E）， we believe Tongda would be capable to obtain ahigher allocation in FY18E （>30%） driven by US client’s launch of new flagshipsmartphones in 3Q18, supplying components to US clients’ notebook, withdollar content staying at ~US$3/unit. We expect Tongda would continue toexplore more in-depth co-operation with US client, as their R&D ratio wouldstay at 4-4.5% in FY18E. At the back of the envelope calculation, we expectUS client would contribute low-teens of FY18E sales and GM.
For glass+metal middle frame, Tongda is currently supplying 2.5D glass+metal middle frame to Nokia, Sharp, Moto & Asus. As glass casings hasalready been adopted in iPhone X, we believe it would also be graduallyadopted by Android camps’ flagships, Tongda expects to ship ~1mn units（10% of FY18E total casing shipment, with ASP double than that of metalcasing and GM at ~28-30%） in FY18E.
China smartphone shipment picks up
More colours on upcoming projects with US handset client
Faster than expected adoption in 2.5D glass+metal middle frame by 1sttier PRC smartphone clients
Overhang removed and negatives priced in, undemanding 8.2x FY18E PEwith fundamentals remains intact
Tongda’s mid-term fundamental still remains intact , we expect Tongda’s salesand EPS to grow 16.3%/25.5% CAGR in FY17-FY20E, with overhang beingremoved and sector negatives already priced in, Tongda’s current 8.2x FY18EPE （~39% discount to HK listed leading smartphone component companies）looks undemanding to us. We value Tongda’s new TP at HK$2.22 （based onFY18E EPS, hence implies 10.1x forward PE and 25% discount to peers）