Soft start in 1Q19 dragged by metal casing business
Tongda’s 1Q19 revenue came in at HK$1,688mn （-5.2% Yoy, ex-notebooksales in 1Q18）， and accounted for 17% of our full year estimates （vs. 20% oftotal revenue in 1Q18）。 The drop in revenue was mainly driven by both lowermetal casing revenue and shipment, as Xiaomi’s revenue fell 36.5% Yoy toHK$518mn and accounted for 30.7% of total revenue （largest client in 1Q19）。
Due to decreasing metal casing orders from Xiaomi, we expect Tongda’srevenue would still face downside pressure given a higher base in 1H18 （totalrevenue +15% Yoy）， however, we do expect glastics business would helpalleviate the top-line downside pressure thanks to increasing Samsung’s orderramp up and new projects from Chinese customers including Vivo （newlyacquired） and oppo on handset casing business. Management also shared withus that Huawei only accounted for ~1% of FY18 total revenue, therefore webelieve recent Huawei incident’s impact on Tongda would be minimal.
Samsung’s order continue to ramp up and drive glastics’ growth, tri-proofproducts gaining market share
Samsung’s order continued to ramp up in 1Q19, with revenue reachingHK$214mn and accounted for 12.7% of total revenue, as they have alreadyengaged in the mass production of glastic back covers for Samsung Galaxy J6+（1st- tier supplier） and also started to supply glastics casing to Samsung A-seriesincluding the recently launched A50 & A70 mid-range handsets. Tongdamaintained their 140mn handset casing shipment target in FY19E and glasticswould still in driver’s seat, and contribute ~70% of total shipment （Managementguided Samsung would contribute 50%, while the remaining would be sharedwithin Vivo, oppo and Xiaomi）， while glass casings’ contribution would still beminimal （~low to mid-teens）。
Tri-proof and high precision components continue to gain market share fromApple, as revenue grew ~72% to ~HK$208mn and became Tongda’s 3rd largestcustomer. As Tongda received new orders for iPad/iPhone USB-C adapters（with lower ASP and GM）， we expect the blended GM for this segment wouldlower to low 20’s due to change in product mix in FY19E （vs. high 20’s in ourprevious estimates）。 We expect Apple would contribute ~18%/~19%of Tongda’srevenue and GP in FY19E.
Dipole antenna business on track
Tongda’s 5G dipole antenna business was on track in 1Q19, as they would shipa small amount to mainstream equipment vendors including ZTE, Nokia andEricsson in 2Q19 and expects mass production in 2H19. We still stick to ourview that Tongda’s previous years’ investment （commenced in 2012） in LDStechnology began to bear fruit, which now makes them well-prepared to tap intoequipment vendors’ supply chain. Tongda is currently the third suppliersupplying 5G dipole antenna to equipment vendors, other leading playersinclude Huizhou Speed （300302 CH） and FRD （300602 CH）。 We are lookingforward to management providing more updates on dipole antenna business inthe upcoming interim result.
Catalysts
Newsflow on issuance of 5G licence to China telcos
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
Undemanding 5.5x FY19E PE with 6.2% yield, 5G theme still on the table
We lower Tongda’s FY19E-21E EPS by 14.1%/17.9%/19.7% respectively to reflect our lower sales and GM assumptionfrom handset related business, we expect Tongda’s sales and EPS would still manage to grow 12.2%/26.9% CAGR inFY18-FY21E. Tongda is still trading at an undemanding 5.5x FY19E PE （2 s.d. below Tongda’s 5-year avg. PE, ~60%discount to casing peers） with 6.2% yield which we believe would limit price downside vs. other peers under currentdampened market sentiment for smartphone supply chains. We value Tongda’s new TP at HK$0.71 （based on FY19EEPS, hence implies 6.8x forward PE and 50% discount to peers vs. 45% discount in our last update）。