Fundamentals
Profit warning though a miss, no material impact on turnaround story
Tongda issued a profit warning alert on Feb 15 after market close that FY18E earnings will drop by 40-50% Yoy to （HK$503mn-HK$604mn） due to sharp decline in both metal casings shipment and ASP, accompanied by inventory impairment which led to segment and blended GM contraction. Tongda’s expected net profit was 21.8%-34.8% below our estimates, implying that the handset casings GM further deteriorated in 2H18E and was below our estimates （CIRL estimates: high-teens vs. >20% in 1H18）。 Though the profit warning was a negative surprise, we believe the price correction （-13% after the announcement） has already factored in the profit warning and presented a good entry point for investors. The profit warning does not have any impact on our FY19E/20E forecast as the turnaround story remains in sight.
Tap into 5G equipment vendors with well-developed LDS technology
Tongda announced in end-Jan that they have completed the R&D on 5G polarized base station antenna （equipped with LDS and POP technology）， which will be applied to massive MIMO antennas used in 5G. Tongda would ship a small amount to mainstream customers （which we believe to include equipment vendors such in Nokia, Ericsson and some major Chinese vendors etc.） in 2Q19. This represents Tongda’s previous years’ investment （commenced in 2012） in LDS technology finally see signs of bearing fruit, which now makes them well-prepared to tap into equipment vendors’ supply chain. Meanwhile, Tongda is also performing R&D on 5G-compatible handset casings of integrated radio and automotive GPS navigation antennas. Given the higher frequency of 5G spectrum （hence lower penetration rate of electromagnetic waves） while leaving extra rooms for slim and complicated mobile device structure, we believe LDS technology would also be adopted in these 5G products, thus reducing different kinds of antenna interferences.
Successful entry into Samsung supply chain, glastics to drive growth
Tongda has also announced that they have been engaged in the mass production of glastic back covers for Samsung Galaxy J6+ （1st- tier supplier） and Tongda would continue to explore further business opportunities with Samsung in the mid-range handsets （including A-series）。 Tongda shipped ~40mn handset casings in 1H18 （65% metal, 35% IMT casings, 10% glass casings）。 Tongda maintained their 140mn handset casing shipment target in FY19E in our recent update, and we expect glastics to be in driver’s seat in FY19E and would contribute ~40% of total shipment, while contribution from glass casings would still be minimal （~10%）。
With In-Mould Transfer （IMT） uni-body casing ASP ~50% lower than that of 2.5D glass+ metal middle frames, we expect Chinese leading smartphone brands’ would adopt these casings in low-mid range handsets. We expect GM to rebound in FY19E, driven by increasing glastics order from Samsung and Chinese smartphone customers, while tri-proof （waterproof/shockproof/dustproof） and high precision components for US client would also contribute to Tongda’s revenue and GM （we expect >10% of GM from this segment）
Catalysts
Mass production of 5G polarized base station antenna
Progress on 5G handset casings and automotive GPS navigation antenna
Faster than expected adoption in glastics by Chinese 1st tier PRC smartphone clients
China smartphone shipment bottoms out in 2H19
Valuation
Sector negatives still weigh on share price, undemanding 5.1x FY19E PE with 5G theme still on the table
Based on the latest profit warning alert, we lower Tongda’s FY18E sales and EPS by 5.4%/32.1% respectively mainly due to lower GM assumption, while sticking to our previous FY19E/20E EPS. We expect Tongda’s sales and EPS to grow 20.0%/55.4% CAGR in FY18E-FY20E. Tongda is still trading at an undemanding 5.1x FY19E PE （2 s.d. below Tongda’s 5-year avg. PE, ~60% discount to casing peers）。 We value Tongda’s new TP at HK$1.09 （based on FY19E EPS, hence implies 6.8x forward PE and 45% discount to peers）。