Fundamentals
FY18E slight beat, gradual GM recovery expected
Tongda’s FY18 result was largely in-line with market consensus but bothrevenue and net profit were ~4% ahead of our forecast thanks to better thanexpected GM which came in at 20% （vs. CIRL estimate: 18.3%）。 Facing asharp decline in both metal casings shipment and ASP, Tongda’s handsetcasings’ GM （excl. tri-proof products） was ~mid-teens based on our estimates,we expect segment GM would gradually improve and pick up tohigh-teens/~20% in FY19E/20E, mainly driven by increasing glastics orderfrom Samsung and Chinese smartphone customers, while ASP and GMpressure on metal casing continue to post a drag on GM recovery.
Samsung’s order to drive glastics’ growth, tri-proof continue to grow
Tongda have engaged in the mass production of glastic back covers forSamsung Galaxy J6+ （1st- tier supplier） and Tongda would continue to explorefurther business opportunities with Samsung in the mid-range handsets（including A-series）。 Tongda shipped ~100mn handset casings in FY18 （45%metal, 45% IMT casings, 10% glass casings according to our estimates）。Tongda maintained their 140mn handset casing shipment target in FY19E andwe continue to expect glastics to be in driver’s seat in FY19E and wouldcontribute ~40% of total shipment （currently supplying ~200k sets/day）， whilecontribution from glass casings would still be minimal （~10%）。
For US client’s tri-proof and high precision components, revenue grew ~100%to ~US$200mn and in-line with our estimates, while GM came in at high 20s,we expect GM maintain stable and would contribute to ~17%/~20%Tongda’srevenue and GP in FY19E
Dipole antenna the upcoming growth driver
Tongda announced in end-Jan that they have completed the R&D on 5Gpolarized base station antenna （equipped with LDS and POP technology），which will be applied to massive MIMO antennas used in 5G. Tongda wouldship a small amount to mainstream customers （which we believe to includeequipment vendors such in Nokia, Ericsson and some major Chinese vendorsetc.） in 2Q19 and expects mass production in 3Q19. This represents Tongda’sprevious years’ investment （commenced in 2012） in LDS technology finallysee signs of bearing fruit, which now makes them well-prepared to tap intoequipment vendors’ supply chain. Meanwhile, Tongda is also performing R&Don 5G-compatible handset casings of integrated radio and automotive GPSnavigation antennas. Given the higher frequency of 5G spectrum （hence lowerpenetration rate of electromagnetic waves） while leaving extra rooms for slimand complicated mobile device structure, we believe LDS technology wouldalso be adopted in these 5G products, thus reducing different kinds of antennainterferences.
Catalysts
Mass production of dipole antenna
Progress on 5G handset casings and automotive GPS navigation antenna
Faster than expected adoption in glastics by Chinese 1st tier PRCsmartphone clients
China smartphone shipment bottoms out in 2H19
Valuation
Undemanding 7.1x FY19E PE, with 5G theme still on the table
We lower Tongda’s FY19E/20E EPS by 23.7%/14.6% respectively mainly due to lower sales and GM assumption,while sticking to our previous FY19E/20E EPS. We expect Tongda’s sales and EPS to grow 15.5%/36.5% CAGR inFY18-FY21E. Tongda is still trading at an undemanding 7.1x FY19E PE （2 s.d. below Tongda’s 5-year avg. PE, ~51%discount to casing peers）。 We value Tongda’s new TP at HK$1.09 （based on FY19E EPS, hence implies 8.9x forwardPE and 40% discount to peers vs. 45% in our last update）。