Tongda issued a profit warning on FY2018E earnings that will beHK$503mn-603mn or 40-50% lower than FY2017. This is primarily due tothe sharp deterioration of both shipments and gross margins of metalcasing products. Glasstic products have yet to achieve target margins of25%+. 5G business revenue contribution will remain light. We trim ourDCF-based target price to HK$1.0 based on revised earnings, implying 7.5x2019E PER. Downgrade to Accumulate.
FY18E net profit down 40-50% as metal casing business weighs. Owing toweakening smartphone shipment trends, Tongda warned its profits could drop40-50% to HK$503mn-603mn from HK$1.0B in FY17. In particular, full metalcasing products which represent about half of handset shipments, sufferedfrom a sharp decline in shipments and lower ASPs and GPM, an inventorywrite-down of ~HK$100m from increased competition and client destocking.
“Glasstic”： lower GPM expected although management sees strong growth.Tongda believes Glasstic GPM has fallen to 20-25% which is lower than the25%+ target. They remain optimistic that shipments could reach 80-90mn in2019E （up from ~50mn in 2018E） as “glasstic” gain traction in low-mid tierphones which are heavily marketed by Samsung/Xiaomi as they expand intoIndia/other EMs.
2019E revenue from Apple on track to reach US$250mn. With increasingallocation of waterproof components from Apple, Tongda expects revenuefrom Apple to grow 25% yoy to US$250mn in 2019E as both waterproofcomponents for Macbook keyboard and iPad Pro charger casings reach full yearcontributions. Tongda is also targeting to supply accessories （iPhone fastcharging adapter） for Apple in 2019E.
5G polarized base station antenna revenue contribution insignificant at thisstage. As Tongda is only beginning to ship in 2H19E, we expect revenue for thissub-segment to reach HK$30mn/HK$300mn in FY19E/FY21E and GPM of~30 %.
Downgrade to Accumulate. We now forecast 15%/17% YoY topline growth anda 54%/30% YoY EPS growth in 2019E/2020E on a low base. Key growth driversin coming two years include Apple business, fast growing Samsung businessand strong demand from China smartphone brands for glasstics, where Tongdahas competitive advantage. We trim our DCF-based target price to HK$1.0based on revised earnings, implying 7.5x 2019E PER and 15% upside.