FY19 net profit missed on lower GM, one-off expense; Handset casing shipment in-line
Tongda’s FY19 result was mixed with revenue grew 3.2% Yoy to HK$9,186mn, which was largely in-line with market, however, net profit was below market consensus by 32.7% （-26% Yoy to RMB401.5mn）。 We attributed the bottom line miss to i） margin pressure in 2.5D glass/metal casing, ii） lack of component upgrade for US client’s smartphone which was unveiled in 3Q19 and iii） higher admin expense ratio （10.3% in FY19 vs. 9.8% in FY18） and interest expense ratio （2.2% of FY19 revenue vs. 1.9% in FY18）。 The hike in admin expense ratio was mainly due to one off items such as plant relocation costs, and expenses related to possible spin-off of household and sports goods for listing in ChiNext Board of the SZ Stock Exchange. （Tongda will still hold 60% stake upon successful spin-off）。
In FY19, Tongda shipped ~140mn handset shipment volume and ~US$230mn revenue target for supplying tri-proof and high precision components to US client, which was largely in-line with our expectation. However, Tongda faced both ASP and GM pressure mainly due to the lack of major spec upgrade in US clients’ latest flagship, as well as increased competition in 2.5D glastic casings. 2.5D glastic casing ASP was down ~20% ~US$2.4/unit, and dragged segment GM down to ~mid-teens, based on our estimation. Tongda shipped 100mn units of glastics casings （~70% of total shipment）， in which 2.5D took up ~35% of total shipment volume, while 3D and unibody glastics, which enjoy higher ASP and GM, each took up ~50%/15% of the shipment volume.
We still expect both 3D and unibody glastics, tri-proof and high precision components would help alleviate the top-line downside pressure in FY20E, in which the former would be driven by Samsung’s order ramp up and new projects from Chinese customers including Vivo （newly acquired and began to supply glastics in 2H19） and oppo on handset casing business
Trimmed down FY20E handset casing shipment target; 3D/unibody glastics to drive growth thanks to Samsung and vivo
Tongda have already engaged 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-series including the recently launched A50 & A70 mid-range handsets, we expect Tongda’s allocation from Samsung would further increase.
Tongda guided down FY20E handset casing shipment to 160mn （vs. 180mn when we last update with management in early Jan）， in which glastics would take up ~80% of total shipment （Samsung ~50%, Xiaomi ~30%, the remaining will be shared among Vivo, oppo）。 For glass and metal casings, they would each account for low-teens and high single digit of the total shipment.
Tri-proof and high precision components share gain continues with GM recovery in FY20E
For tri-proof and high precision components continue to gain market share from Apple （~40% in FY19 vs. 30-35% in FY18）。 Though facing lower ASP （due to no spec upgrade in iPhone 11） and GM on legacy products, Apple contribute ~20%/~24% of Tongda’s revenue and GP in FY19 and become one of Tongda’s top 3 customer. After having built up years of relationship, we believe Tongda would be capable to receive additional orders from Apple. It is expected Apple would launch 3 series of smartphone in the next 12 month with massive upgrade in components, in which iPhone 9 series would be likely unveiled in early 2Q20, while iPhone 12 would face a delay in shipment amid COVID-19.
Dipole antenna contribution minimal in FY19
Due to the delayed buildout of 5G BTS, Tongda’s 5G dipole antenna sales contribution was minimal in FY19, but we expect sales would ramp up in FY20E as upon full launch of 5G service in China. We still stick to our view that Tongda’s previous years’ investment （commenced in 2012） in LDS technology began to bear fruit, which now makes them well-prepared to tap into equipment vendors’ supply chain. Tongda is currently the third supplier supplying 5G dipole antenna to equipment vendors, other leading players include Huizhou Speed （300302 CH） and FRD （300602 CH）。
Trading at trough valuation, diversifying client and product mix to drive earnings despite near term industry weakness ;Initiate BUY with TP HK$0.51
We expect Tongda’s FY19-21E sales and EPS to grow 8.3%/19.5% driven by glastics casing, increased order allocation of US smartphone clients accompanied by gradual GM expansion, while faster than expected ramp up of dipole antenna sales would be an upside catalyst, as it has not been fully factored in market’s earnings forecast. Tongda’s share price has underperformed HK listed peers and tumbled 47% in the past 30 days, due to investors’ much lower appetite for small caps. Tongda is trading at an undemanding 4.9x FY20E PE （~1 s.d. below Tongda’s 3-year avg. PE, ~65% discount to casing peers） with 3.6% yield. We initiate Tongda at BUY with TP at HK$0.51 （based on FY20E EPS, hence implies 6.2x forward PE and 55% discount to peers）。